Merrill on the CRH-Secil deal

In scale terms, Merrill estimates proportionate consolidation of Secil for a full year in 2005 would add 3.5 per cent to group sales, seven per cent to EBITDA 05E. The additional debt for the stake (EUR372m) plus the share of Secil¹s own debt would raise 2004E YE gearing from 33 per cent to 41 per cent (for this deal alone ­ in fact we expect, and hope, that CRH will find more value-adding deals to absorb at least its EUR520m of free cashflow after dividends and maintenance capex, and perhaps more, given current under leveraged balance sheet).

Assuming fast track clearance (given no overlaps) Merrill expects consolidation from end June to add around EUR6m to net income (pre goodwill amortization of EUR2m pa) and EUR10m (0.7 per cent enhancement) or 1.2 per cent to 2005E earnings ­ this is not yet included in its forecasts above pending some details. Meanwhile, the forecasts above are some three per cent above Merrill’s previous forecasts for 2004E EPS pre-goodwill due to somewhat better expectations for CRH¹s acquisitions in 2003, and similarly two per cent higher for 2005E.

As ever, says Merrill, CRH¹s acquisitions are never especially exciting in themselves (no building materials operation in mature markets ever is, we¹d argue) but are value- and earnings-accretive, and their individual small increments add up to a low risk but in the end significant addition to net income.

Acquiring a stake in Secil for 7.4x 2004E EBITDA (when Merrill expects a further small reduction in volumes and EBITDA after the 17 per cent dive in Portuguese cement volumes in 2003) is a fair-to-cheap price (P/E c 16x, although after a high depreciation charge of 13 per cent of sales due to past asset revaluations in Portugal) given the modest scope for Portuguese demand to improve in coming years (modest due to still high consumption levels). For a duopoly market, structure is attractive.

Negatives relate to the split ownership, although CRH might be able to take full control in the future if Semapa¹s Queiroz Pereira family chose to concentrate their resources on other investment projects. Merrill prefers wholly owned deals, but appreciates that CRH appears to have good management jointly agreed and shares in distribution of cashflow.