More pain ahead for these companies’ shareholders

Building and construction companies face toughest conditions in 20 years

Boral Limited (ASX: BLD) chief executive Ross Batstone recently said that conditions in the building and construction sector were the worst in 20 years.

In an effort to highlight the sector’s plight, the Housing Industry Association (HIA) organised a industry round table meeting at Parliament House in Canberra yesterday, with 40 building industry representatives attending, including CSR Limited (ASX: CSR) and Boral. The Association has pressed the Federal government to provide more stimulus for the weak building industry.

HIA managing director Shane Goodwin has told the Australian Financial Review (AFR) that the industry is building 20,000 fewer homes each year than had been the average for the past 20 years. He also said residential construction is experiencing its second recession in just four years.

In 2011, housing starts fell by 11.2% — HIA has forecast an 11.5% decline in starts in 2012, falling to levels significantly below those experienced during the GFC. Listed building materials and construction companies have seen their share prices hammered over the last two years.

We often hear about stocks hitting one year lows, but CSR has seen its share price hit a near 27 year low, as the outlook  for the construction sector looks bleak. The stock is currently trading at $1.17, a fall of over 56% since a year ago.

Boral has seen its share price slump by more than 27% in just the last four months, as the weak housing conditions forced the building materials group to downgrade earnings forecasts for the second time since April 2012.

Adelaide Brighton Ltd’s (ASX: ABC) share price has gone against the trend, rising 12% over the last year. Perhaps because the company has more exposure to the resource rich states of Western Australia and Queensland, it is less affected by a commercial and residential slowdown. Interestingly, the Barro family’s group of companies now own 29% of ABC, and have been quietly creeping up the register. The AFR has speculated that the Barro family want to be in a strong position, should a takeover offer for ABC materialise (sorry!).

James Hardie Industries (ASX: JHX) is the best performer in the sector, with its share price rising over 40% since July 2011. The group’s dominant market share in fibre cement, its main product, and solid profit margins and higher exposure to the US, means the company is less affected by conditions in the Australian housing market. Signs of a housing recovery in the US have likely spurred the share price higher.

To boost improvement, the building and construction sector is looking for further interest rate cuts, but also for Federal and state government action to lift a substantial portion of the taxation burden from new housing.

According to the HIA, previous studies have shown that over 40% of the costs of a new house and land package can be government taxes, levies and charges.

Details from a report by the Centre for International Economics suggests the residential building industry is directly worth $70 billion to the Australian economy. The report also concluded that a 1% increase in productivity in the housing sector can boost the broader economy by a factor of more than 4. Similarly, for every dollar of taxation removed from housing construction, there is a return of $2.46 to the economy.

The Foolish bottom line

From the evidence it seems clear that the housing sector is facing far worse business conditions than retailers. The problem for both sectors, is that a recovery in the short-term appears unlikely.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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