So much for the “golden age of construction”. UBS’s latest deep dive into European building materials takes a hammer to that narrative, and to Kingspan Group PLC's (EURONEXT:KRX) rating, which it cuts to 'neutral' from 'buy'.
The Irish insulation and panels group, long a darling of investors betting on the green building boom, now faces what UBS calls “increasing complexity” in its equity story.
Translation: too much exposure to Europe’s sluggish non-residential sector, and a lack of clarity about strategy, particularly around a possible spin-off of its data centre business, Advanced Insulation Systems.
UBS’s analysts reckon that about 70% of the “lightside” building materials sector, covering insulation, pipes and fittings, depends on European residential and commercial construction.
That is a problem because, on the bank’s numbers, growth there is close to zero next year and just 2% in 2027. With mortgage rates stuck and capital expenditure flat, there is little sign of the recovery that would lift demand for Kingspan’s products.
Heavyside materials such as cement and aggregates look brighter. UBS thinks the best is yet to come for names such as Heidelberg Materials, Holcim and CRH, which it rates 'buy'.
The cement producers, it argues, will benefit from the European Union’s tougher emissions trading rules due in 2026. Those will raise carbon costs, and UBS expects producers to pass that through in higher prices.
Heidelberg and Holcim both get upgrades to 'buy', while CRH remains the top pick thanks to its heavy exposure to US infrastructure spending.
On the flipside, Wienerberger, the Austrian brickmaker, gets a Sell rating, and Rockwool, the Danish insulation group, stays in the same camp.
UBS sums it up neatly: the lightside of construction still needs a European recovery that is not coming. For now, investors may want to stick with the heavyside names pouring the concrete rather than those cladding the walls.