Concrete crumbles if you get the mix wrong. HeidelbergCement, afflicted by a similar malady in M&A, is writing down assets acquired before the financial crisis. Brexit and coronavirus contributed to the group’s decision to take €3.4bn of non-cash charges on Tuesday. Two-thirds related to the 2007 top-of-the-cycle acquisition of Hanson, a UK corporate raider that became a humdrum aggregates group.
Better late than never. The charges will not affect liquidity and this year’s results were going to be weak anyway. Expensive deals such as Hanson are the reason the balance sheet of the German group carries more ballast than rivals such as LafargeHolcim and Saint-Gobain, depressing returns on capital. Goodwill accounted for almost a third of total assets at Heidelberg last year. It is closer to a fifth at its two competitors.
Another legacy of cement consolidation is Heidelberg’s leverage; net debt was close to three times ebitda at the end of last year. The Hanson deal pushed net debt to 6.5 times ebitda. After paying that down, Heidelberg took on more debt to buy Italcementi in 2016, shortly after Lafarge and Holcim completed their all-share merger. Investors in both groups have had little to celebrate since. Total returns from mid-2015 to the end of last year were flat for Heidelberg and down a tenth for LafargeHolcim. Share prices have remained depressed this year.
Higher leverage and lower returns are one reason Heidelberg shares trade at a persistent discount. They are worth just nine times two-year forward earnings compared with 13 for LafargeHolcim and 12 for Saint-Gobain. A tidier balance sheet should help Heidelberg close the gap on both. Heidelberg’s expected returns on invested capital will move to 5.9 per cent for 2021, from 5.3 per cent, thinks Citi. LafargeHolcim should earn 6.1 per cent compared with 8.2 per cent for Saint-Gobain.
The construction industry will benefit from stimulus and recovery spending in the US and Europe. Sweeping up the mess of past building work puts Heidelberg in a better position to make the most of it.
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