Bumpy Road Ahead, Resilient Cash Flow
Comment of the Day

October 28 2010

Commentary by Eoin Treacy

Bumpy Road Ahead, Resilient Cash Flow

Thanks to NCB for this informative report by Murray McCarter focusing on CRH. Here is a section:
Despite challenging conditions and limited visibility, we expect the dividend to be maintained at the current level in 2010 and 2011, equating to a dividend yield of 5.1%, the highest in the sector. We forecast free cash flow to remain strong in 2010 (€905m) and 2011 (€809m), resulting in the dividend being covered circa 2.0x by free cash flow in both years.

Cautious approach to acquisitions. We estimate CRH can spend circa €500m on acquisitions per annum (and maintain the dividend) without materially increasing debt levels. We anticipate a cautious approach to acquisitions going forward given the uncertain economic conditions and do not believe that a large acquisition is likely to provide a catalyst in the short to medium term. We expect further disposals with the European insulation business the most likely in the short-term.

Delayed recovery in US materials due to weak state and local spending. We expect state and local spending on highways to lag any economic recovery by up to two years. Furthermore, the implementation of a new six year highway bill looks unlikely in the short term and the bulk of recovery funds will be spent by the end of 2011.

Pricing in US materials likely to remain challenging. We do not expect pricing in aggregates to change materially in 2010 and 2011 and expect flat to +1% as the most likely outcome. Key to maintaining margins in asphalt in 2011 will be CRH's ability to increase prices to offset rising raw material costs, this may be difficult given the challenging construction market in the US.

Strong exposure to improving European markets. Exposure to the likes of Poland, Switzerland and Finland will support European activity in H2 2010 and a return to growth in 2011. However the Netherlands and southern Europe remain weak.

Eoin Treacy's view CRH took a significant hit from the slowdown in US, Irish and UK construction but remains one of the largest global cement manufacturers, with a steady stream of cashflows. The failure to diversify into Asia and Latin America, where the bulk of global growth is likely to be generated over the next decade probably means that the share is destined to a lengthy base formation development.

However, at a yield of 5.02% investors are being rewarded to wait. Over the last few months, the primary question for many has been whether the dividend would be sustained and while that is still an open question investors appear to be taking a more sanguine attitude of late.

The share found support in the region of the 2008 and 2009 lows from early September and rallied sharply only to give up the advance. It found support in the same region again last week and a sustained move below €11.50 would be required to question scope for some further higher to lateral ranging.

Disclosure - I have a spread-bet long position in this share.

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