If there's one thing managers of various businesses within CRH have learned under chief executive Albert Manifold, it's not to get too comfortable.
In his almost eight years in charge of the Iseq behemoth, Manifold may have continued the building materials giant’s acquisitive streak – spending the equivalent of $17.6 billion (€15.6 billion) on deals.
But he’s also been ruthless with his red pen, raising $8.4 billion over the same period selling businesses that were no longer delivering the required returns or growth potential, or otherwise not justifying continued existence within the group.
It came as little surprise, therefore, to some followers of the group when it was reported this week that Manifold has hired advisers to find suitors for its North American glass building products unit, Oldcastle Building Envelope, with a mooted price tag of $3 billion-plus.
Projects
The unit, which makes glass building products for projects ranging from storefronts and building entrances to skylights, has proven to be a solid business that’s made plenty of money for CRH over the years, despite sales and earnings being dented in 2020 as Covid hit non-residential construction. More recently, it’s had to contend with a spike in aluminium prices as a reopening of the global economy has unleashed the spectre of inflation.
CRH, of course, takes a long-term view and would look through these temporary issues.
But the group’s disposals in recent years of its US and European building products distribution units – simplifying the group and creating a more digestible story for investors around roadbuilding, infrastructure and building products – means that the Oldcastle Building Envelope business has stood out as more of an outlier.
“CRH is always focused on what creates most long-term value for shareholders. It is that light that the recent speculation should be viewed,” said David O’Brien, an analyst with Goodbody Stockbrokers.
Shares
CRH's shares spiked last month when it revealed that its earnings before interest, tax and deprecation (ebitda) margin had widened by 0.5 percentage points in the first nine months of the year, to 17.1 per cent, defying a trend that has seen industry margins contract in recent times in Europe and North America amid rising energy, raw material and labour costs.
But, for Manifold, anyone who had been keeping track of the group’s transformation over the past decade – from a company that operated under the maxim of turning “big rocks into small rocks” – shouldn’t have been surprised.
“We don’t sell rock anymore. We sell roads. We sell the whole solution. We take the rock, we turn it into asphalt, our contractors lay it and then they maintain it,” he told analysts on a call late last month.
“We’re more of a price maker than a price taker these days. We get so much more value from supplying engineering, planning and technical expertise and design knowledge. We’re very much working in our customers’ offices these days, helping solve their [problems] with the products we manufacture… It’s more the software than the hardware that drives the value for us.”
It may be a stretch if Manifold expects the market to start applying high tech-like valuations to CRH’s stock.
But the biggest roadbuilder in North America’s steady evolution is best observed via its earnings margin, which has more than doubled to 17 per cent since Manifold took the reins.
While CRH and other building materials groups received a boost on Donald Trump’s election as US president in November 2016 amid speculation that he would prioritise a promise of more than $1 trillion in infrastructure spending, the Republican president failed to deliver.
Investment
In fairness, Manifold never got caught up in the Trump hype, seeing enough to be getting on with the five-year highways investment plan signed by Barack Obama at the tail-end of his presidency. It underpinned much of CRH's heavy spending over 2017 and 2018 on two cement businesses focused on the fast-growing population belt between Florida and Texas.
The investment appears even more judicious since Joe Biden signed a $1.2 trillion bipartisan infrastructure bill – after months of horsetrading between Democrats and Republicans.
As the largest building materials business in North America, CRH says that it is “very well-positioned” to benefit from this significant increase in infrastructural investments, not just in roads, but also in various water, power and technology infrastructure.
In Europe, CRH has been increasing its bet on central and eastern Europe, where the EU will be channelling significant infrastructure funds over the next five years. It is a top-two cement player in the Polish, Hungarian, Slovakian and Romanian markets.
Meanwhile, Swedish activist investor Cevian, which ruffled feathers in CRH headquarters when it revealed in early 2019 that it had taken a small stake and called for “far-reaching structural and operational improvements” in a group that had “become too complex”, has been keeping a lower profile of late.
And well it might. Shares in the company, already well down the road of simplifying itself before Cevian showed up, are up almost 70 per cent since then.
