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Activist Cevian wants more focused CRH, says stock could double

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By Johannes Hellstrom

STOCKHOLM (Reuters) – Irish cement maker CRH <CRH.L> <CRH.I> needs to press ahead with extensive structural improvements, activist shareholder Cevian told Reuters, adding that the company could double in value in the next three to five years if it does so.

CRH has been on a $10 billion (7.89 billion pounds) acquisition spree over the past four years, accumulating a complicated structure, but has now begun shedding some assets and put its $2.3 billion European distribution arm up for strategic review.

U.S.-based peers Eagle Materials <EXP.N> and Summit Materials <SUM.N> have both attracted activist attention this year, and Cevian, Europe’s biggest activist shareholder, disclosed its almost 3% stake in CRH in February.

CRH has around 90,000 staff and strong market positions in Europe and North America, where it is the biggest producer of aggregates and asphalt for highway construction. Its businesses include heavy materials, building products and distribution.

“This is an attractive industry and CRH has a strong position in its main markets, but the company has become too complex, both structurally and operationally, which hampers performance and traps value,” Cevian’s managing partner Christer Gardell told Reuters.

“The restructuring work that has been done so far is good, but continued far-reaching structural and operational improvements are needed for the Group’s assets to reach full potential,” he said in Cevian’s first detailed comments on CRH since disclosing the stake.

He said Cevian had met with CRH’s board and Chief Executive Albert Manifold several times in recent months and he was confident they would drive the measures still needed.

“They seem to be both pragmatic, shareholder-oriented and willing to ask fundamental questions around the businesses,” Gardell said.

In a bid to boost shareholder returns, CRH last year started buying back shares and set a medium-term target to sell 1.5-2 billion euros worth of non-core assets.

CRH’s business in the Americas has gained in importance in recent years and now accounts for about two-thirds of the group’s core profit, but the valuation gap between CRH and its more focused U.S. peers remain pronounced.

CRH trades at around 13 times forward earnings, according to Refinitiv SmartEstimates, compared with multiples of 22 for North Carolina-based Martin Marietta <MLM.N> and 25 for Alabama-based Vulcan Materials <VMC.N>.

The biggest end-market is infrastructure, where investment needs are significant, according to many analysts.

“With potential for improving margins in asphalt and easing weather comparables, we anticipate it to be the potential in Americas Materials in 2H19 which will be the focus on the FY19 outlook,” Jefferies analysts wrote in a note on Wednesday.

CRH is due to report first-half results on Aug. 22.

CRH reported a 12.6% core profit margin (EBITDA) in 2018 on sales of nearly 27 billion euros, and targets a margin of around 16% by 2021, far higher than analysts’ consensus of just over 14%, according to Refinitiv estimates.

That compares with LafargeHolcim’s <LHN.S> 20.1 percent and HeidelbergCement’s <HEIG.DE> 17.0 percent.

According to Cevian’s analysis, raising CRH’s margin to the industry mean of 16% and valuing the company at average peer multiples would warrant a 60-70% appreciation in value.

Lifting the margin to 19%, and adding organic growth and cash generation to the mix, could add up to a doubling of CRH’s value over the next years, in Cevian’s view. With around 13 billion euros under management, Cevian owns stakes in blue chips including robotics and automation group ABB <ABBN.S>, mobile network equipment maker Ericsson <ERICb.ST> and steel-to-elevators company Thyssenkrupp <TKAG.DE>.

(Editing by Georgina Prodhan and Elaine Hardcastle)

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