|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|23 Aug 2018||ABC||A$6.25||A$6.20||Neutral|
52-Week Range: A$5.56 – 7.08
Industry: Building Materials
Market Cap: A$4,033.8m
We rate ABC as a Neutral due to the following reasons:
- Macro conditions remain solid for ABC, with the focus on infrastructure spend in key markets (especially east coast of Australia).
- Solid balance sheet position.
- Leading positions as a lime producer, concrete products producer and cement and clinker supplier.
- Capital management – ABC has a long history of paying special dividends.
- Whilst a new CEO and CFO presents short term uncertainty, over the long-term it may represent upside as new strategic direction could be set for the Company.
We see the following key risks to our investment thesis:
- Any softer sales volume than expected.
- Softer than expected pricing increases.
- Higher than expected energy prices.
- Deterioration of A$ relative to other currencies.
- Unfavorable weather impacts.
ABC’s share price was weaker after the Company’s full year outlook came in below market expectations. ABC expects 2018 full year underlying NPAT of $200-210m versus current consensus estimates of $212.8m.
The midpoint of the range suggests consensus earnings downgrade of approximately -3.6%. ABC’s 1H18 revenue was up +11.7% to $807.2m, underlying operating earnings (EBIT) was up +9.3% to $123.5m and underlying NPAT was up +9.8% to $85.2m.
The Company also declared a 4cps special dividend along with an interim dividend of 9cps. In our view, this was a solid result, with buoyant trading conditions in key markets. However, the negative from the result release was the announcement of further management changes.
The Company announced that current CFO Michael Kelly has resigned effective 3 November 2018, which means ABC will now have a new CFO and CEO in the not too distant future given current CEO/MD Martin Brydon announced his retirement in May 2018. .
In our view, Mr. Kelly would have been an appropriate CEO and it is disappointing to see him leave. In our view, this increases near-term uncertainty and with the stock already trading on fairly full multiples, we maintain our Neutral recommendation.
1H18 result highlights.
- Revenue of $807.2m was up +11.7% on the previous corresponding period (pcp), however, excluding acquisitions, was up +7.7%. The Company noted they experienced improved volume growth in most products, with strong east coast markets.
- Underlying EBIT of $123.5m was up +9.3% on pcp, and underlying NPAT was up +9.8% due to improved volumes and higher prices, with operational improvements helping offset energy cost pressures.
- Dividend with a special. The Company declared an interim dividend of 9cps, up from 8.5cps in pcp, as well as a special dividend of 4.0cps.
- Cement volumes were up +7.6% on pcp driven by ongoing solid demand in the east coast (particularly Melbourne and Sydney with the commencement of construction phase of infrastructure and commercial developments) and growth in SA (Northern Connector underway). Demand in WA and NT was noted as stable. Cement prices were also up in majority of the markets.
- Lime volumes were stable during the period, with management noting that import pressures remain and selling prices were slightly lower (driven by contractual pricing arrangements).
- Concrete and Aggregates saw strong demand, with volumes up +7% (or up +20% including acquisitions). Strong demand also lifted prices.
- Concrete products revenue was up +4.1% with EBIT stable has strength in NSW offset slower demand in Queensland.
Lot of management changes. We hold Martin Brydon and Michael Kelly in high regards, which is why we are a little disappointed that both are departing so close together. Especially given the Chairman is also relatively new in the position as well (albeit not new to the Company). Further, we also considered Mr. Kelly as the most appropriate replacement for Mr. Brydon. ABC is a stable business, with market leading positions. We do not expect changes at the management level to result in significant shift in strategy. The Company expects to make an announcement relating to the CEO in 4Q18, while the search for the CFO is underway.
Figure 1: ABC’s businesses, and revenue by state
Figure 2: ABC Financial Summary
Source: BTIG, Company, Bloomberg
Adelaide Brighton Ltd (ABC) is an Australia listed construction materials and liming producing company. ABC is Australia’s leading (1) lime producer in the minerals processing industry; (2) concrete products producer; and (3) cement and clinker importer. ABC is Australia’s number two cement and clinker supplier to the Australian construction industry and number four concrete and aggregates producer.
|Recommendation Rating Guide||Total Return Expectations on a 12-mth view|
|Speculative Buy||Greater than +30%|
|Buy||Greater than +10%|
|Neutral||Greater than 0%|
|Sell||Less than -10%|