TEXT-S&P Summary: CRH PLC
The ratings on Irish building materials group CRH PLC reflect Standard & Poor's Ratings Services' view of its strong market shares and highly diversified portfolio across products and markets, and are underpinned by the group's solid free operating cash flow (FOCF) generation. Offsetting these strengths is the group's significant exposure to cyclical new construction and energy- and capital-intensive processes. In addition, CRH has a meaningful concentration in the U.S. (accounting for 45% of group sales and 46% of group EBITDA in 2011). The exposure to a number of markets subject to sovereign concerns in Europe--including Ireland, Portugal, and Spain--is modest (together accounting for less than 5% of 2011 reported group EBITDA). CRH's "intermediate" financial risk profile reflects ongoing spending on acquisitions and is the primary ratings constraint. In our view, the group's exposure to its home market of Ireland does not impair the ratings, given the group's diversified income base and liquidity resources, and the local nature of its taxable income.
S&P base-case operating scenario
CRH's revenues increased in 2011 by 5.3%, which was in line with our base-case credit scenario, after sales decreased in the past three years. In our base case, we anticipate that CRH's revenues will continue to grow organically (excluding acquisition activity) by low-to-mid single digits in 2012. This will largely result from some successful price increases and some moderate improvement in its North American operations, rather than meaningful volume-based growth.
CRH's reported EBITDA margin of 9.2% for 2011 remained structurally lower than that of its heavy material peers because of the group's sizable distribution activity. Reported like-for-like EBITDA declined by EUR51 million in 2011, due to increased input costs coupled with a delay in passing cost inflation on to consumers. This increase in input costs was not completely offset by CRH's successful cost savings of EUR154 million as a part of its now-EUR2 billion cost-efficiency program spanning 2007-2011. Overall, we note that CRH's energy cost balance is meaningful, at about 9.5% of group revenues. Key input costs are split 15% electricity, 50% asphalt, and 25%-30% fuel.
In our base-case scenario, we forecast that CRH's Standard & Poor's-adjusted EBITDA margin will increase slightly to about 9.5% in 2012, and will further improve over the medium-to-longer term due to the group's increasing concentration on its high-margin-generating materials segment. We note, however, that increasing labor costs do present a challenge to the sector. We believe peers will likely struggle to pass those fully on to customers. This will likely result in some delay in margin recovery across the sector.
S&P base-case cash flow and capital-structure scenario
Despite the ongoing difficult market conditions in 2011, CRH was able to maintain its credit metrics at the levels commensurate with the current rating with funds from operations (FFO) to debt of about 30%. The group continues to generate high cash flow despite increased dividend payouts this year, a step-up in capital expenditure (capex) in 2011 to EUR576 million, and acquisition activity (EUR528 million spent in 2011, EUR230 million spent so far in 2012). We note, however, that acquisition spending is partly covered by asset sales (EUR442 million in 2011). We believe that CRH will continue to undertake bolt-on acquisitions should the right opportunities arise. We also anticipate that CRH will increase its capex and its dividend payouts over the rating horizon of 24 months.
Nevertheless, we anticipate that CRH's credit metrics will remain at FFO to debt of moderately more than 30% in 2012, which we consider adequate for the current rating. We believe management has a strong track record of counteracting any adverse market developments by reducing discretionary spending such as acquisition activity, dividends, and capex, and thereby protecting the group's balance sheet. We therefore anticipate that CRH will continue to generate strong FOCF consistently in the future, despite likely working capital swings and an increase in capex. Overall, the group's near-term approach to acquisition spending and actions to protect cash flow generation remain important parameters for the stability of the ratings and the outlook.
We believe that the recent settlement with SEMAPA - Sociedade de Investimento e Gestao, SGPS, S.A. (SEMAPA; not rated) over the cement joint venture Secil--which led to the sale of CRH's 49% stake in the joint venture and the receipt of a EUR564.5 million payment from SEMAPA--will likely support an improvement in credit metrics in the near term and provide a cushion for ratings downside for the time being. Nevertheless, we believe that CRH's management will likely consider the proceeds from the sale to be funds for discretionary spending rather than for paying down the group's debt.
The short-term credit rating is 'A-2'. We consider CRH's liquidity to be "adequate," under our criteria. As of Dec. 31, 2011, significant cash balances of EUR1.29 billion, EUR29 million in liquid investments, and about EUR1.9 billion in undrawn committed lines (of which EUR135 million are maturing within one year) support liquidity sources. CRH has successfully refinanced EUR0.6 billion of near-term facilities with a EUR1.5 billion syndicated, five-year bank facility. This, combined with our forecast of solid positive discretionary cash flow generation before potential acquisition spending, amply covers the EUR519 million of debt due in 2012, and should be sufficient to cover additional EUR1.5 billion debt maturities until December 2014. We believe, however, that a meaningful part of the group's cash balance will be utilized for acquisition spending over time, which is our main rationale for maintaining an "adequate" liquidity assessment rather than a potential "strong" one.
Management has stated that it intends to continue acquisition-related spending in the near term. However, the magnitude of investments will depend on the developments in the group's end markets. In addition, we believe that the group's "adequate" liquidity position will allow it to fund the negative first-half intra-year working capital seasonality. We forecast FOCF of about EUR750 million in 2012, despite a likely pickup of capex in 2012 (we estimate about EUR600 million of capex in 2012).
CRH successfully completed an issue of EUR500 million seven-year Eurobonds at a coupon rate of 5% in January 2012.
Some of CRH's bank debt, private placements, and available lines are subject to maintenance financial covenants, including a minimum half-yearly tested 4.5x EBITDA net interest coverage limit and a minimum net worth of EUR5 billion. Depending on the underlying credit documentation, we note that covenant calculations allow for certain exceptions, such as acquisition- and joint venture-related amendments. These might make it difficult to predict covenant headroom at all times. However, we believe CRH should continue to meet all covenants with sufficient headroom. Reported EBITDA net interest coverage was 7.4x and net worth was EUR12.1 billion at year-end Dec. 31, 2011.
The stable outlook reflects our view that CRH's credit metrics should remain at levels commensurate with the 'BBB+' rating, such as FFO to debt of 30%-35%. Specifically we anticipate adjusted FFO to debt of moderately more than 30% at year-end 2012, recovering gradually to about the mid-30s thereafter. It also reflects our belief that CRH will likely continue to generate healthy free cash flow, and takes into consideration an ongoing difficult trading environment and some acquisition activity. Any substantial recovery in the group's sales and profitability generation will likely stem from significant operating leverage at CRH's U.S. operations once the industry recovery gains traction in this market. However, we do not believe that this is likely to occur before 2013.
Downward rating pressure could arise if credit metrics were below our guideline for the rating and if we were to consider them unlikely to recover in the short term. This could be the case if CRH were to spend a total of EUR1.5 billion on acquisitions at once over the next few months, which we consider unlikely at this stage, or if its key markets were to become more depressed (particularly the U.S. and Central European markets). Lastly, CRH's inability to pass on increased input costs to customers could pressurize operating results. The group's near-term approach to acquisition spending and actions to protect cash flow generation remain, in our view, the most important parameters for the stability of the ratings and outlook at this stage
We could consider raising the ratings if CRH were to improve and sustain its credit metrics at the upper end of the range commensurate with its "intermediate" financial risk profile. This would mean adjusted FFO to debt in the high 30% bracket. In our view, such an improvement seems unlikely at this stage, given the group's planned acquisition spending.
Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Top 10 Investor Questions: Global Building Materials And Products Companies, March 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Key credit factors: Business and Financial Risks In The Global Building Products And Materials Industry, Nov. 19, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- Acquisition Risk And Its Effect On Ratings, Sept. 11, 2006
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