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September, 2018 6:01 PM



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Buy the Builder Materials Suppliers

Buy the Builder Materials Suppliers

By Bob Kohut 04.12.2017


The Performance of Construction Index (PCI) measures construction activity across Australia monthly.  The Index is produced by the Australian Housing Industry Association (HIA) with a measure over 50 indicating improving strength in the construction sector, and readings below 50 indicate a weakening.  The October report came in above 50 for the ninth consecutive month.  The report concluded that non-mining infrastructure work pushed engineering construction to 10-year highs.

Research from Macquarie Wealth Management extended the forecasted $237 billion for infrastructure projects over the next four years to $323 billion, based on added spending from projects not yet fully funded.

The first choice of many Aussie investors looking to capitalise on the infrastructure mini-boom could be the engineering and construction firms.  Another option with potentially less risk would be the building materials suppliers for infrastructure projects.  The big engineering and construction firms will compete for infrastructure contracts, leading to winners and losers.  However, given the scale of some of the projects envisioned it is likely construction firms will need to rely on more than one building materials suppliers.  In short, suppliers stand to benefit regardless of who wins a contract.
 
To varying degrees the ASX building materials suppliers are exposed to the residential construction market, with some focusing almost exclusively on that segment.  The chief economist at CommSec is bullish on infrastructure spending stepping in to offset declines in residential construction, expecting GDP growth near 3% for the “next few years” as a result.

Many of the major projects in the works are transportation related, from roads and bridges to railways and tunnels to airports.  Macquarie is reporting the existing $16.6 billion allocated for roads and the $5.5 billion for railways are approaching record spending levels, with more projects expected.

There are five major large cap building materials stocks on the ASX with some more likely to benefit than others. Here is the table including the five with share price movement and forward-looking indicators.  



Of the five, Fletcher Building (FBU) is New Zealand based and struggling with lagging business leading to profit downgrades; and Brickworks Ltd (BKW) and CSR Ltd (CSR) tilt heavily toward residential construction.

The major players if this mini-boom materialises as promised appear to be Boral Limited (BLD) and Adelaide Brighton (ABC) for one primary reason – concrete.

While some projects will include buildings making use of products supplied by Brickworks and CSR, it is hard to envision a major infrastructure project that does not rely on concrete, and concrete related products.

Boral appears to have the best prospects and is the only Australia based building materials supplier with an analyst consensus rating of OUTPERFORM.

A visit to the company’s website is revealing.  Of the 18 current projects underway, 15 rely required Boral’s core products – cement, cementitious products, and asphalt.  Of the company’s 10 listed product offerings, seven relate to heavy construction typical of roadways, bridges, tunnels, and runways.  Attendant buildings to major projects may need Boral plasterboard, roofing tiles, and timber.

While some skeptics point to the high valuations of these stocks as reasons to stay away, Boral has a Forward P/E of 16.73, slightly higher than the current average sector P/E of 15.19 with a respectable 5 year expected P/EG Ratio of 1.36.  The company pays a fully franked dividend with a current yield of 3.2%.  
Between FY 2016 and FY 2017 revenues declined 1.2% but net profit rose 15.6%. Boral’s CEO revised an earlier prediction expecting the infrastructure boom to last five to six years upward to 10 years.  Boral also benefits from the low Australian dollar due to its operations in North America.

Adelaide Brighton is a virtual pure-play cement producer, with a product line including cement, lime, concrete and aggregates, concrete masonry products, and clinker – a pellet-like substance formed as a by-product of manufacturing cement.  The company lacks the US exposure of rival Boral.  

Cement products are essential to residential construction as well, as Adelaide derived 31% of its FY 2016 revenues from residential construction.  The company’s Half Year 2017 Financial Results released in August were less than stellar, with a 4.7% revenue increase failing to save the company from a net profit decline of 10.9%.  Management is expecting Full Year 2017 profit to come in at between $188 and $198 million, an improvement over FY 2016’s reported profit of $186.2 million.  Despite the profit decline, investors pushed the stock price upward.  The following price movement chart compare the performance of BLD and ABC over the past year.


The status of Brickworks Limited (BKW) as a primary player in residential construction is evidenced by the company’s share price movement during the housing boom, reaching and eclipsing multiple all-time highs. Here is the chart.


The company is hardly a pure residential construction player, as its operations include an investment arm and a property arm, supplementing its core building materials division.  The Buildings Product Group includes nine branded building material product offerings from precast concrete panels to roofing and timber, to bricks and masonry to brick facades systems.  The product line is dominated by bricks, with five of the total offerings.  

The share price got a boost from the Half Year 2017 Financials released in March that included a 19% revenue increase and a 48% rise in profit. 


Full Year Results released in September reversed the declining price movement with the company reporting record underlying net profit after tax (NPAT) of $196.4 million, a 43% increase over FY 2016, representing the company’s fifth consecutive year of growth.  Improvement in statutory net profit – including one-off items – increased 138%.

Given its product line, Brickworks is unlikely to benefit from road and rail construction, but could see a boost in revenues from projects utilising bricks or pre-cast panels.

However, there are other reasons to consider this company.  The Land and Development Group is involved in acquiring, rehabilitating, and selling surplus land from building products operations.  The company’s Investment Division is a 47.2% owner of Washington H Soul Pattinson (SOL) a major ASX listed investment group.  The stake in SOL is often cited by some analysts and experts as a reason to buy BKW to gain exposure to the investment sector.

CSR Limited (CSR), like Brickworks, is primarily involved in supplying the residential construction market. The company has four operating divisions – Building Products; Glass; Aluminum; and Property.  The property division essentially replicates the Brickworks operation, developing land from former operational building materials sites.

With the exception of the company’s aerated concrete soundproofing barriers for roadways and rails, the company’s core product lines will be of limited revenue generating potential for large scale infrastructure projects.  The Viridian glass line the CSR roofing systems might find their way into structures constructed to support infrastructure projects. Despite the red-hot residential market in recent years, CSR has suffered from its ill-fated foray into the aluminum business.  The company was in negotiations to sell its interest in Gove Aluminum Finance, with no word on the status of the deal and the price of aluminum has risen as part of the global commodities surge. 

However, the improving price was not enough to spare the company a stock price collapse following its Full Year 2016 Financial Report where the 11% rise in net profit was not enough to calm investors, nervous over the 10.5% decline in earnings before interest and taxes from the Aluminum sector.  


The company does pay a more than respectable dividend, although it is only 50% franked.  It appears investors concerned about a slowdown in residential housing remain unconvinced that CSR can benefit from upcoming road, railways, airports, and other major infrastructure projects.  



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