Value emerges, but not in EMs; HeidelbergCement up to CL Buy
We make 8 rating changes and reinstate on CRH with a Buy
Recent share price volatility and the rebasing of our price targets to 2017
earnings leads to various changes in our recommendations. In addition to
our upgrades of HeidelbergCement and Crest Nicholson, we raise
LafargeHolcim to Buy from Neutral and Skanska to Neutral from Sell, while
downgrading Eiffage to Neutral from Buy. In our accompanying report, we
downgrade Taylor Wimpey and Redrow to Neutral from Buy and upgrade
Foxtons to Neutral from Sell. We reinstate a rating on CRH as Buy.
HeidelbergCement & Crest Nicholson added to Conviction Buy List
We keep Wienerberger and Buzzi on our Conviction Buy List, with both
stocks offering exposure to European recovery. We also upgrade
HeidelbergCement to Buy (from Neutral) and add it to the Conviction List,
reflecting its strong exposure to DM – including the US, which we expect to
recover in 2H – and inexpensive valuation after recent underperformance.
In a separate report, UK Housing: Selective value remains after strong run;
CL-Buy CRST, we also add Crest Nicholson to the Conviction List, based on
its sound returns, strong land bank and high growth.
After a mixed 1H, we remain positive on European recovery
Construction and cement data in 1H was mixed in our view, with cement
markets remaining subdued in Europe, being restrained by bad weather in
the US and weakening in emerging markets. However, we continue to have
a positive outlook on European construction – we forecast real growth in
Western Europe of 2.9%/2.8% in 2016/17 vs. 2.6%/2.5% previously.
Developed market residential exposure remains the key theme
Our key theme remains residential construction exposure in developed
markets. While European data remains mixed, our thesis is supported by
the European residential bank lending survey, which is at all-time highs.
We also favour exposure to the US building materials end market, as we
think 2H could see a rebound in activity after bad weather weakened 1H.
Finally, we continue to favour exposure to operating leverage to a
European recovery.