Building Materials
SECTOR REVIEW
Starting to price in the US recovery
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Upgrade sector to Overweight from Underweight
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Upgrade CRH and Saint-Gobain to Outperform
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Keep Holcim and Lafarge at Underperform
The key catalyst for our more positive view on the sector is the emergence of
incrementally better data from the US housing market—specifically we believe
US housing starts will trough in 2009E. We cite four key improving data points
for our more bullish view: 1) recent data on starts; 2) declining levels of absolute
inventory; 3) significantly improved affordability; and 4) improved confidence
indicators. Given that the US housing market is the earliest point on the global
construction cycle—both in terms of geography and end market—we believe
firm evidence of a recovery, if it materialises, would provide confidence that a
new global construction cycle is beginning.
At the stock selection level we focus on three key criteria: i) geographic
exposure—we favour companies with greater exposure to mature markets over
emerging markets given our view on the cycle; ii) we favour companies with
balance sheet strength; and iii) valuation.
CRH is our key Outperform idea. On our three criteria: the group will generate
c50% of its profit in the US in 2009 on our estimates and has a robust balance
sheet with a 2009E Net Debt/EBITDA ratio of 1.9x. At 11.5x 2010E P/E, a c5%
discount to its historical median multiple of 12.1x, we view its valuation as
attractive. We thus believe the market is not yet pricing a US recovery into CRH.
Our new 2010 EPS estimate of