Last year Princedale Group, the marketing services to plastics business, acquired a loss-making shopfitting business, The Sloane Group, for pounds 4.9m
That deal is increasingly looking like a masterstroke. In the current year Sloane is expected to make profits of pounds l.8m out of likely group profits of pounds 4m. Good growth prospects mean that in the longer run Sloane could build itself into a business with a pounds 40m to pounds 50m turnover making profits of pounds 5m.
Progress on anything like that scale should lead to a rerating of Princedale’s shares which, at 34.5p, are on a prospective p/e ratio of just around 8.5 times. But the company has a very strong cashflow, helped by a conservative depreciation policy. It seems a fair bet that the company understands its business well enough to be able to sustain these rates for the foreseeable future.While the implications of the Tilcon acquisition are digested by the market, the shares will probably take a respite from their strong growth of the last two years.And on a yield of 1.6 per cent, the shares are not cheap. Even if these deals enhance earnings however, there is a risk they could water down the return on investment.But CRH has achieved an average return on investment, including goodwill, of a little over 16 per cent over the last 16 years. With a high return on investment – 18 per cent last year – it will prove increasingly difficult to find new deals which can boost the rate much higher.
To continue with a similar rate of growth will mean ever bigger acquisitions. It caps several years of strong growth in the Republic, where a good economic backdrop has supported a steady rise in house building. Mr Godson warned that, overall, he expects growth to be moderate in the second half.To the investor coming fresh to the company, it is a question of balancing these factors with the undoubted management strengths at the company. If Europe and the UK remain sluggish, a justification for the current high share rating rests on the US and Ireland continuing to steam ahead.Robert Donald, an analyst at NatWest Securities, who rates the company highly, believes this is the key issue. “It all depends on whether and when there can be recovery in their weaker markets,” he said.But he is concerned that, after the strong outperformance in the shares over the past two years, the short-term outlook could nevertheless well be one of stagnation.Another caveat is that CRH risks being hoist upon its own petard. Nor did a stronger punt against the likes of the Dutch guilder help.While sales in the UK rose 15 per cent, trading profit was down 12 per cent, as a result of poor weather coupled with a fall in housing starts. The now perennial question of when the UK market will recover seems to have been deferred again, and CRH does not hope for much improvement now until 1997.It is in the company’s homeland, the Republic of Ireland, where results continue to roar ahead.
When he was 16 his father decided the family should leave – not out of abhorrence at apartheid but because he believed South Africa would become increasingly unstable. Sales surged 18 per cent to pounds 150.1m, with trading profit surpassing even that, up 24 per cent to pounds 22.7m. Profits were held back by a poor performance in Europe – chiefly a result of bad winter weather, especially across northern Europe, which affected construction work and road repairs. Since 1985, it has grown from a market capitalisation of pounds 200m to its present pounds 2.3 billion.At the same time as announcing the deal, it unveiled its first- half figures for this year. Sales in the US and Ireland (15 per cent of the total) grew strongly. We don’t set any grand acquisition plan from head office,” he says.
