Canny CRH no more than a hold

Aegis; Sherwood International
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The Independent Online

CRH is a large, highly acquisitive company, pulling off dozens of deals a year but it is no dream client for the City's fee-hungry investment bankers. This canny Irish building materials firm has no fewer than 14 development teams in-house working on acquisitions full-time. The deals are mostly small transactions, not headline grabbers that need expensive external advisors.

Yesterday, the company announced that it had spent 294m euros (£177m) on 20 bolt-on acquisitions in the first half, not counting the 160.5m euro purchase of Mount Hope Rock Products during the period. That's slow going by this group's standards. Last year saw more than 60 acquisitions for a total of 1.6bn euros, while 1.4bn euros was spent in 1999.

Yesterday also brought news of a set-back: that the European Commission has blocked the 300m euro purchase of the Finnish precast concrete products maker Addtek International. CRH says it will try and rework the purchase.

Ever since CRH first ventured out of Ireland in the late 1970s, its strategy has been ambitious but low key. It buys small local building materials businesses in Europe and North America, then acquires nearby competing firms, so building up regional operations.

The point is that large glamorous deals won't usually create value (except for the advisers), as you end up overpaying. Buying lots of "mom 'n pop" outfits and putting them together has proved a highly successful strategy for CRH. It also offsets risk, with its interests spread widely. Once acquired, the group operates its businesses on a decentralised basis, with local and regional autonomy encouraged.

CRH is now the largest producer of building materials in the US and one of the largest in the world. In March it launched a big rights issue, raising 1.1bn euros, at a massive 49 per cent discount (again the discount was taken to avoid hefty fees in underwriting the issue). The money is being spent on acquisitions.

Inevitably, the shares lurched lower on the rights issue and this would have provided a good opportunity to buy into this quality story. The shares yesterday closed down 0.5 euros at 20.38, while broker ABN Amro is forecasting earnings this year of 1.24 euros per share, giving a prospective price/earnings ratio of 16.4. But, given the uncertain economic scenario and the stock's partial recovery recently, it ranks no more than a hold.


It is apparent that what started out as a downturn in technology and financial services advertising in the US is now a global contagion infecting most business and consumer market segments. That's the message that Aegis, the media buying and market research group, was forced to communicate yesterday in a pre-interims trading statement.

May and June saw advertising markets in Europe, where Aegis clocks up 80 per cent of its sales, plummet as the US advertising recession spread. Worse still, its relatively minor operation in Argentina, where economic conditions are truly abysmal, has turned from making a £3m profit to a £3m loss virtually overnight.

The acceleration of the downturn is shown by the fact that at the AGM in May the slowdown was judged to be moderate. Since then trading has deteriorated markedly as shown by Carat Freeman, its US unit, where sales of $25m (£18m) in 2000 are showing a 40 per cent decline in the year-to-date.

In Europe, the hot economies of southern Europe have turned cold. Northern Europe, however, is said to be holding up better. Yet this begs the question of how long these more buoyant markets can continue relatively unaffected.

Investors yesterday chose to assume the worst. This saw the stock hammered, plunging 20 per cent to 87p, reducing Aegis to levels last seen in 1998. The stock is now just one-third of the price of its early 2000 peak and could become a bid target in a consolidating global advertising sector.

On the reckoning of ABN Amro, the house broker, full-year pre-tax profit should still come in at around £80m since the company's expansion in the US should push sales higher notwithstanding the market's weakness. This is also true in the market research segment where Aegis is busy investing. The stock, now on a prospective price-earnings ratio of 17, is worth a look for bold investors with an appetite for long-term growth.

Sherwood International

Yet another shareholder nightmare is unfolding at Sherwood International, a computer services supplier to the insurance industry, which warned yesterday that it would report only a small operating profit for the first half. The likelihood of 2001 marking a second year of business decline at Sherwood saw the stock price sliced in half, closing at 137p. This puts the company well within the growing 90 per cent club – having lost that much of its market capitalisation. Cut losses.