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Building up a picture of the state of Irish construction

Building up a picture of the state of construction

What do CRH, Kingspan and Grafton, which unveiled half-year results, tell us about the construction sector, asks Dan White looks at what they tell us about the sector

Ireland's three construction stocks; CRH, Grafton and Kingspan, unveiled their half-year results last week. With output increasing rapidly, what do these interims tell us about the state of the construction industry?

CRH is very much the 800lb gorilla of the Irish-quoted construction stocks. Despite the poor, ie, construction-unfriendly, weather in the first quarter, it delivered a set of interims in line with previous guidance.

Chief executive Albert Manifold described the out-turn as "satisfactory".

Sales at CRH increased by 1pc to €11.9bn and on a like-for-like basis (when acquisitions and disposals are excluded) by 2pc in Europe and by 3pc in North America.

Ebitda (earnings before interest, taxation, depreciation and amortisation) were up 1pc to €1.13bn and pre-tax profits from continuing operations rose by 5pc to €497m.

Even for what has always been an acquisitive company, CRH was extremely busy in the first half of 2018, with the group spending €3.4bn on new businesses and selling businesses for €2.9bn. It also spent the first €350m on its €1bn share buyback.

Both acquisition spending, up fivefold on the €632m spent on new businesses in the first half of 2017, and divestment proceeds, up almost twentyfold on the €145m received in the first half of last year, rose sharply.

The main acquisition in the first half was the €2.85bn Ash Grove cement deal in the US along with €390m of smaller, 'bolt-on' deals.

On the disposal side, the biggest deal was the €2.4bn sale of its US distribution business. Last month CRH announced another disposal, the €510m sale of its European DIY assets.

It was this combination of increased dealmaking activity and the €350m spent on the share buyback, along with seasonal factors, that was largely responsible for the €1.7bn jump in CRH's net debt to €8.05bn.

Davy analyst Barry Dixon reckons that CRH's net debt will fall back to about two times ebitda, slightly less than €7bn, by the end of the year

 

For the full year, most analysts are predicting ebitda of about €3.4bn with Goodbody's Robert Eason pencilling over €4bn for 2019.

"As we look ahead to the second half of the year we anticipate a significant inflow of operating cash, consistent with previous years," says CRH finance director Senan Murphy.

So what, if anything, do the CRH interims tell us about the health of the Irish construction sector?

The problem with using CRH as an indicator of the state of the Irish building industry is that the vast majority of its businesses are now located outside of Ireland.

Of its full-year 2017 sales of €25.2bn - like most building materials companies, CRH records most of its profits and sales in the second half of the year - a mere €435m (1.7pc) were to customers in the Republic of Ireland. This trend continued into the first half of 2018 with Irish sales of just €202m (1.69pc).

Insulation company Kingspan also reported its half-year results last week.

It grew sales by 15pc (19pc when currency movements are factored out) to €2bn. Profits didn't grow quite as strongly, with ebitda up by 11pc to €232m while trading profit (basically operating or pre-interest profits before the amortisation of intangible items) advanced by 10pc to €195m.

Good old-fashioned pre-tax profits were up by 9pc to almost €178m. Total acquisition spending hit €235m in the first half, compared to just €8.6m in the first half of 2017, with the group's net debts climbing by €275m to €739m.

Like CRH, Kingspan's Irish operations constitute a very small proportion of the overall figure.

A far better gauge of the performance of the Irish construction sector is builders merchanting and DIY group Grafton, which also released its interim results last week.

Grafton increased its first half sales by 9pc to £1.45bn (€1.6bn), operating (pre-interest) profits before property gains by 14pc to £88m and pre-tax profits by 19pc to £90m (Grafton reports its results in sterling).

Grafton's Irish sales of £312m (€345m) - 21pc of the total - grew by almost 12pc in the first half, which was much stronger than for its UK sales, which rose by 6.7pc to £1.01bn.

The group's Irish operations, which had been a drag on Grafton's overall performance in the years following the 2008 crash, are now benefiting hugely from a resurgent construction sector. While Ireland contributed just over a fifth of Grafton's total first-half sales, its Irish profits, which rose by 21pc to £24.4m, represented almost 28pc of the group's overall profits.

The undoubted star of the show was Grafton's Irish DIY chain Woodie's which increased its first-half sales by 16pc to £98m and its operating profits by a jaw-dropping 55pc to £7.3m as its operating margin widened from 5.6pc to 7.5pc.

With soaring house prices forcing many homeowners to stay put, Woodie's seems to be benefiting as consumers opt for a spot of DIY and renovate their existing homes instead.

While the operating margin at Grafton's Irish merchanting arm (basically the Chadwicks and Heaton Buckley builders providers chains) fell to 8.1pc in the first half of 2018 compared to 8.6pc for the same period last year, this was due to a change in the sales mix.

"The big one is Grafton as the other construction-related companies' Irish sales are so relatively small. Overall the UK is slowing down. Ireland is going in the other direction," says Goodbody Stockbrokers' chief economist Dermot O'Leary.

Grafton looks set to benefit from continued expansion in the Irish construction sector in the coming years. O'Leary is predicting an increase in new housebuilding output to 18,000 this year, up 25pc from the 14,400 built in 2017.

This growth in new housebuilding will continue for several years, as demand gradually catches up with supply with annual output hitting 25,000 by 2020 and 35,000 by the early to mid-2020s.

"The residential sector is in for a sustained period of expansion," he says.

However, O'Leary does sound a note of caution. "A major part [of increasing housebuilding activity] will be the role of the public sector, whether or not the Government will be able to meet its commitments."

So with Irish housebuilding and infrastructure construction activity both growing strongly what could possibly go wrong?

Construction activity is acutely sensitive to movements in interest rates as both developers and buyers largely rely on borrowed money.

In the United States, the Federal Reserve has already raised interest rates seven times since December 2015. On this side of the Atlantic, the ECB is widely expected to start pushing up its official interest rates next year.

Even in advance of this it has already cut back its bond-buying programme to €30bn a month, with a further reduction to €15bn a month planned from next month and quantitative easing due to stop altogether in December.

Without the ECB in the market, long-term bond yields are already starting to move up even before the official rates are increased.

While O'Leary is fairly relaxed about the prospect of an ECB rate hike, arguing that its current monetary stance is inappropriate for Irish conditions, he predicts that it will focus even more attention on the Central Bank's mortgage-lending regulation, which place tight restrictions on the multiple of their income homebuyers can borrow.

This has already become an issue in large parts of Dublin, particularly south of the Liffey, and if not addressed will result in further urban sprawl, he warns.