Residential activity should continue to benefit from the reinstatement of investor incentives from January 2002

The magnitude and breadth of the global equity market downturn during 2002 has meant that no sector of the market has escaped sharp share price falls.

This is in contrast to equity market conditions in 2001, when it was the technology, media and telecom stocks that were the main cause of the declines in the overall equity market indices.

The building materials sector is one area of the market that held up reasonably well in the early part of the year. However, over recent months the share prices of many companies in the sector have declined quite sharply. Lafarge, which is the largest European cement producer, saw its share price decline by 20 per cent over the past three months. RMC Group's shares in the UK suffered an even bigger fall of 33 per cent, while CRH's share price fell by approximately 24 per cent over the past three months.

As well as generally weak equity markets the bad weather of 2002 has also had an adverse impact on many companies in the sector.

Readymix, which is one of the smaller building materials companies quoted on the Irish stock exchange, has suffered from the very poor Irish weather over the spring and summer.

Approximately 60 per cent of Readymix's sales originate in the Republic of Ireland, with the balance emanating from Northern Ireland and the Isle of Man. Volumes were well down during the first half of the year due to a weak commercial sector and weather-induced weakness in the residential sector.

Looking to the second half of the year there are reasons to be more optimistic. Weather permitting, residential activity should continue to benefit from the reinstatement of investor incentives from January 2002. Home bond registrations, which are an approximate lead indicator of residential building activity, rose by more than half in the first six months of this year. This suggests that residential construction activity will be strong in the second half of this year.

In contrast, commercial and industrial activity is expected to continue to be slow. Office vacancy rates, particularly in Dublin, continue to rise and will act to discourage new development activity.

One area of strength relates to infrastructure activity, which is underpinned by the National Development Plan. Despite pressures on the public finances, there is a considerable pipeline of public works projects already agreed. However, on a medium-term view there is a risk that many projects could be delayed as a means of reducing overall public sector expenditure.

CRH, Ireland's biggest quoted building materials company, will also be affected by the above factors.

However, CRH is now an internationally diversified company, with approximately 15 per cent of its profits generated in the Irish market. CRH has established itself as one of the better managed international building materials companies.

Many investment analysts take the view that CRH deserves a premium valuation rating due to its strong management and history of steady growth. As can be seen in the accompanying table, CRH is now trading in line with its international peers. Its price-earnings ratio (PER) is 11.0 compared with 10.9 for the RMC Group and 11.7 for Lafarge. CRH's dividend yield of 1.5 per cent is quite low compared with the 4.0 per cent yield offered by Lafarge. However, CRH's low dividend payout is primarily due to its active acquisition strategy that has been the prime driver of the company's above average long-term growth rate.

Not surprisingly, Readymix has a much lower stock-market rating reflecting its small size, narrow range of activities and the fact that RMC holds a dominant position in the stock. Nevertheless, it does offer attractive investment value with a low PER of 6.8 and a dividend yield of 4.2 per cent. It does have a sound balance sheet and generates significant cash flow from its operations that should enable the company to grow its dividend over the medium term. As long as the Irish economy performs reasonably well over the medium-term Readymix should enjoy steady if unspectacular growth.

While the Irish economy is still important for CRH, its share price will be driven primarily by the performance of its international businesses. Building materials is a cyclical business but CRH has reduced the cyclical nature of its earnings through a very effective strategy of geographical and regional diversification.

Despite the onset of a tough and uncertain economic climate these two Irish-quoted building materials companies do offer sound long-term investment value.