Performance has been sluggish and now there are questions about top management’s benefits

ANALYSTS HAVE been upgrading Irish building materials behemoth CRH. Goldman Sachs and Zack’s Investment research both argued that it was undervalued. JP Morgan Chase initiated coverage of the company with a similar rating.

Others recommended that investors hold on to the stock, without increasing their exposure. Only Citigroup suggested that it was overvalued and recommended selling.

Since the effective demise of the banks, CRH is the biggest company on the Irish Stock Exchange and accounts for around one-third of the benchmark Iseq index. But there is an argument that it has underperformed, and that at least part of its strategy needs tweaking. Its shares closed at €14.665 yesterday. At the end of 2006, they were close to twice that.

It is just over two years since the group raised €1 billion in a two-for-seven rights issue. The move, ranked as one of the largest fund raisings undertakings in Irish corporate history, was designed to fund acquisitions.

CRH believed suitable businesses would be on the market at good value, as its peers had borrowed too much and would be keen to offload assets to undo damage to their balance sheets.

That didn’t happen. Instead, improved bond markets later in 2009 allowed these companies to refinance. Since the fundraising, CRH’s acquisition activity has remained muted.

“It has been disappointing,” says David Holohan of Dublin firm Merrion Stockbrokers. He argues it’s time to look again at CRH’s traditional approach of buying bolt-on acquisitions, which effectively means it grows in small increments.

Last year was not the happiest in the group’s history. In August, it reported that first-half profits before tax were down 77 per cent at €25 million. At the same time, it warned that earnings before interest, tax and write offs – Ebidta – a measure of the cash it generates, would fall below 2009 levels in the second half. This was in spite of a prediction two months earlier that they would increase. The August statement turned out to be on the money, with turnover coming in at €1.61 billion, 10 per cent down on the previous year. Profit before tax was down €200 million at €534 million.

CRH blamed sluggish conditions in the US, where it was expecting a stimulus package to kick in, for earnings dip. Holohan says that its dependence on the US, where stimulus funding is running out, and Europe, and a failure to make any meaningful move into emerging markets contrasts with that of it peers.

The group is upfront in admitting that it was cautious about emerging markets. It has taken a stake in Home Products in India and is involved in a joint venture with Chinese cement manufacturer Yatai. Chief executive Myles Lee said last year that it would look to increase its presence in emerging markets.

Internally, there is said to be concern, particularly in the US, at how well the group’s executives are rewarded in terms of pay and other benefits at a time when sales have fallen by around 20 per cent over the past four years and the company’s share price has halved. Insiders say that there should be some correlation between executive pay and stock value.

Outside observers, such as Alan Brett of company information and proxy service specialist Manifest, point out that pay at the highest levels are not out of line with the group’s sector, but it says that they are at the upper end of what is normal. Lee’s total package dipped by €12,000 to €2.443 million last year. His retirement benefit was €980,000 in both years. Chief operating officer Albert Manifold was paid €1.463 million, which included a retirement benefit of €354,000.

The 2006 Finance Act effective capped pensions by taxing assets of €5 million-plus. In response, CRH’s remuneration committee gave executives the option of choosing to cap their pensions and take a taxable non-pension allowance as an alternative. Both Lee Albert Manifold opted for this.

In an effort to cut costs, the group ended its defined benefit plan in the US last year. There was an overall saving of €6 million in pension costs, which dropped to €173 million. Within that, the cost of the defined benefit schemes fell to €125 million from €139 million, just under 10 per cent. Just under 65,000 CRH staff are in defined benefit schemes, meaning that the average contribution for each was €1,924. Lee’s payment equated to more than 500 times this figure in 2010. The figures are broadly the same for 2009, with the average for each worker at €2,049 and 478 times.

CRH groups its pension schemes. The Irish payments are in the euro zone. It has separate plans for the sterling area, Switzerland and the US. The total euro zone cost in 2010 was €13 million, down from €24 million in 2009. Lee’s payment was the equivalent of 7.5 per cent of the total bill in 2010 and 4.1 per cent of the total in 2009.

The annual report points out that the retirement payments to both Lee and Manifold are based on the reduction in what the group’s liability would be if the executives had opted to stay in the group’s pension schemes.

Their overall pay has raised some hackles as well. Last year, the average CRH worker received €35,620, against Lee’s salary and the €1.463 million paid to the head of its US business, Mark Towe. When all benefits are taken together, CRH spent an average of €47,580 on each worker. Lee’s package was 51 times that, while Towe’s was 31 times.

Staff say that they are not against the principal of paying executives well or ensuring that they reap benefits when the company performs well. However, they argue that the flipside of this is that their bosses should be taking some of the pain as well. Lee’s and Manifold’s retirement benefits rankle in light of the fact that the defined benefit scheme has been cut.

In response, CRH argues that it has an outstanding long-term record of growth.

“While, in common with almost every company on the globe and with all of its competitors and peers, it has been affected by the severe and synchronised downturn of recent years, it is a business that has enjoyed periods of above average growth over its 40 years of operations,” a statement says.

“In setting remuneration packages, CRH takes into consideration the remuneration practices of other international companies of similar size and scope, trends in executive remuneration generally and the EU Commission’s recommendations on remuneration in listed companies.”

It also points out that details of executive pay are published in its annual report and shareholders get to vote specifically on directors’ remuneration at the annual general meeting. This year’s vote was carried by 96.4 per cent in favour.

Manifest acknowledges that CRH follows best practice in this area, and its most recent report on the company does not raise any concerns. Brett suggests that premia are paid to its executives because it is one of the biggest in its sector.

Holohan argues that pay should have some relevance to the share price which he says is the most relevant benchmark.