CRH's material transformation, 'undervalued' outlook get Morgan Stanley upgrade

Morgan Stanley upped its rating to 'overweight' from 'equal weight' and its price target to €35 (3,128p) from €32.5 as the addition of US cement manufacturer Ash Grove is seen as a value-accretive deal that along with CRH's "material transformation" over the past three years appears to be "undervalued" by the market.

The past three years has seen CRH reduce its exposure to US building, increased its exposure to infrastructure and allowed for cost optimisation through vertical integration.

Analysts expect CRH to give more colour on Ash Grove profitability and targets in its 21 November trading update, initially estimating at least €100m of synergies thanks to balance sheet optimistion and a good geographical fit.

"Coupled with continued positive contribution from building, this should result in 2-3% volume growth per annum near-term for cement and aggregates."

Morgan Stanley analysts expect these developments to result in four years of solid 7.3% compound annual growth for EBITDA, yet the shares have recently derated versus peers.

This makes CRH "the most compelling investment in the sector" and the "top pick" status, with low risk seen in earnings delivery.

Main downside risks are a lack of recovery in European building, of which CRH has two thirds exposure, or continued US dollar depreciation.