Big in the material world

Blue Chip: It may not have hogged the City spotlight, but CRH is a force to be reckoned with on American roads
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The Independent Online
As An Irish company, CRH tends to lead a life somewhat away from the City spotlight. However, that changed briefly last week, when it announced the purchase of Tilcon, the US roads construction materials group, in a pounds 212m deal from BTR.

The largest acquisition ever by the company, it also leaves CRH as the undisputed number one asphalt supplier in the north-eastern region of the United States.

Although it is a big deal by previous standards, it fits well into the existing business, and the group's overall pattern of acquisitions. Few questions have been raised about the move, probably because CRH is one of those rare exceptions to the general trend: it has managed to prove itself a success in the US.

American sales already account for the bulk of its revenues, at 31 per cent, just a fraction below mainland Europe. Tilcon will now make the US the biggest part of the group by a long way, with sales of IRpounds 540m (pounds 521m) plus.

Quite why CRH has this ability is difficult to say. It may have something to do with its Irishness - expatriate Irish in the US building industry could be a help too. When Don Godson became chief executive in 1995, he kicked off a letter to employees in the staff magazine with the opening sentence of the Irish novelist James Joyce's revolutionary arcane work Finnegan's Wake. Presumptuous, or a reflection of the educated Irish background from which CRH's management is drawn?

The company has a more prosaic view. As Myles Lee, financial controller, explains, acquisitions are driven by the individual subsidiaries out on the ground. "They encounter their competitors through their business. We don't set any grand acquisition plan from head office," he says. It means that whenever CRH makes an acquisition, it already knows the target company well. It also has a habit of sticking with the existing management.

Proof of the strategy comes with the figures. Since 1985, it has grown from a market capitalisation of pounds 200m to its present pounds 2.3 billion.

At the same time as announcing the deal, it unveiled its first- half figures for this year. Sales in the US and Ireland (15 per cent of the total) grew strongly. Profits were held back by a poor performance in Europe - chiefly a result of bad winter weather, especially across northern Europe, which affected construction work and road repairs. Nor did a stronger punt against the likes of the Dutch guilder help.

While sales in the UK rose 15 per cent, trading profit was down 12 per cent, as a result of poor weather coupled with a fall in housing starts. The now perennial question of when the UK market will recover seems to have been deferred again, and CRH does not hope for much improvement now until 1997.

It is in the company's homeland, the Republic of Ireland, where results continue to roar ahead. Sales surged 18 per cent to pounds 150.1m, with trading profit surpassing even that, up 24 per cent to pounds 22.7m. It caps several years of strong growth in the Republic, where a good economic backdrop has supported a steady rise in house building. Mr Godson warned that, overall, he expects growth to be moderate in the second half.

To the investor coming fresh to the company, it is a question of balancing these factors with the undoubted management strengths at the company. If Europe and the UK remain sluggish, a justification for the current high share rating rests on the US and Ireland continuing to steam ahead.

Robert Donald, an analyst at NatWest Securities, who rates the company highly, believes this is the key issue. "It all depends on whether and when there can be recovery in their weaker markets," he said.

But he is concerned that, after the strong outperformance in the shares over the past two years, the short-term outlook could nevertheless well be one of stagnation.

Another caveat is that CRH risks being hoist upon its own petard. With a high return on investment - 18 per cent last year - it will prove increasingly difficult to find new deals which can boost the rate much higher. To continue with a similar rate of growth will mean ever bigger acquisitions. Even if these deals enhance earnings however, there is a risk they could water down the return on investment.

But CRH has achieved an average return on investment, including goodwill, of a little over 16 per cent over the last 16 years. It seems a fair bet that the company understands its business well enough to be able to sustain these rates for the foreseeable future.

While the implications of the Tilcon acquisition are digested by the market, the shares will probably take a respite from their strong growth of the last two years.

And on a yield of 1.6 per cent, the shares are not cheap. But the company has a very strong cashflow, helped by a conservative depreciation policy. Investors new to the company should be happy with the sort of returns that CRH can continue to generate. A long-term buy.