Australia, well Sydney might be experiencing an almighty housing boom, but the building industry is still struggling.
According to statistics from the Australian Bureau of Statistics (ABS), approvals for units are skyrocketing, but private sector house approvals are headed backwards. In May 2015, approvals for houses dropped 8.4% and are down 2.4% for the year. At the same time, dwellings excluding houses were up 16.6% for May compared to April 2015 and 46% since May 2014.
The value of total building approvals fell 0.9% in May and has dropped for three consecutive months, which may be a warning sign.
For Australia’s building materials companies, including the likes of Adelaide Brighton Ltd (ASX: ABC), Brickworks Limited (ASX: BKW), Boral Limited (ASX: BLD), CSR Limited (ASX: CSR), Fletcher Building Limited (Australia) (ASX: FBU) and James Hardie Industries plc (ASX: JHX) the news is likely to have mixed reactions.
Here’s our quick take on each of those companies…
Adelaide Brighton Ltd (ASX: ABC)
Adelaide Brighton was listed on the ASX in May 1962, so the company has been around for a while. The company generates around $1.3 billion in revenues annually, with 54% of that coming from cement – as you can see from the chart below.
Source: Adelaide Brighton presentation
Over the past 10 years, Adelaide Brighton has delivered average annual returns of 14.4%. Ray Barro, one of the non-executive directors holds around a third of the company, which is nice to know and suggests the company is likely to look after its shareholders. At the current price of $4.40, AdBri is trading on a P/E ratio of 16.4x and paying a 3.9% fully franked dividend.
Brickworks Limited (ASX: BKW)
Brickworks primary asset is a 43% holding in Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), which gives the company exposure to TPG Telecom Limited (ASX: TPM), New Hope Corporation Limited (ASX: NHC), Ruralco Holdings Ltd (ASX: RHL) and Australian Pharmaceuticals Industries Ltd (ASX: API) among others.
Apart from that investment, Brickworks has 2 main divisions, Building Products Group, which supplies masonry, timber, bricks, pavers and tiles, and the Land & Development Group handling property investment & sales and waste management.
Across the 3 groups, Land & Development generated 41% of earnings before interest and tax (EBIT) in the 2014 financial year, with building products delivering another 30% and investment the remaining 29%.
Source: Annual report
Currently trading on a P/E of 20.5x and paying a trailing 3% fully franked, Brickworks is forecasting a very strong second half from Building Products, flat earnings from the Land & development division and an increased return from Soul Patts. That suggests the current P/E and yield are probably misleading, and Brickworks could be a good buy from here.
Boral Limited (ASX: BLD)
One fly in the ointment for Brickworks could be the proposed clay brick joint venture between Boral and CSR. Boral generated $5.2 billion in sales, and $294 million in EBIT in 2014, from a wide array of products from quarries, concrete, asphalt, bricks, timber, plasterboard and ceiling products as well as cladding and roofing. As you can see from the chart below, construction materials and cement represent 61% of revenues and a large portion of earnings. Boral’s US division is improving but is still losing money at an EBIT level.
Source: Annual report
At the current price of $5.91, Boral is trading on a trailing P/E ratio of 26.9x and paying a fully franked dividend yield of 2.5%. Returns over the past decade haven’t been great, with total shareholder return averaging 2.4% per year.
Based on the current P/E of more than 31, clearly investors are expecting huge growth from Boral. According to Commsec, analysts are expecting earnings to surge by 58% this financial year, which should see the P/E ratio fall to more reasonable levels. Given the complexity in Boral’s business, and an unprofitable US division, I’d be steering clear for now.
CSR Limited (ASX: CSR)
CSR generated just over $2 billion in revenues in the year to the end of March 2015, and an underlying net profit of $146.5 million. CSR has four main divisions, comprised of Building Products, Glass, Aluminium and Property.
Source: Annual report
At the current price of $3.42, CSR is currently trading on a trailing P/E ratio of 13.7 and paying a dividend yield of 5.8% (unfranked). That possibly reflects the issues CSR has experienced over the past 10 years with an average shareholder return of -1.2% per year. However, CSR is now debt free, with around $68 million in cash and the 2015 profit result was the highest in five years. The company is forecasting a better result in 2016 too, suggesting CSR might be one to watch.
Fletcher Building Limited (ASX: FBU)
Headquartered in New Zealand, Fletcher Building derives just under half its revenues domestically, with 39% coming from Australia and a further 13% from the rest of the world. Last financial year, Fletcher delivered revenues of NZ$8.4 billion and earnings of NZ$624 million.
The company operates 5 divisions: infrastructure products such as concrete pipes, building products, laminates & panels, distribution and construction. Here’s the breakdown of EBIT by division last financial year.
Source: Annual report
The outlook for the company appears mixed. Businesses sold in the previous year will impact performance, which will be partly offset by further cost savings. New Zealand is expected to be solid, while Australia, North America and Europe should deliver similar results to last year. Slower growth in China and political instability in Thailand may affect performance. Fletcher is forecasting underlying earnings of around NZ$650 million this year – an improvement on last year.
Fletcher is currently trading on a trailing P/E ratio of 17.3x and paying a 4.4% unfranked dividend yield.
James Hardie Industries plc (ASX: JHX)
Believe it or not James Hardie is actually an Irish public limited company (hence the plc), although the company has been listed on the ASX since 1951 and was established in 1888. The company has moved jurisdictions a number of times, and now generates most of revenue in the US from fibre cement products.
Many of the company’s plants are located in the US, with three in Australia, 1 in New Zealand and another in the Philippines. You may also not realise that James Hardie operates a number of silica quartz mines in the US. Silica is used in its fibre cement products. Virtually all the company’s products are fibre cement sheets used for flooring, siding, commercial exteriors and interior walls and ceilings.
Around 77% of the company’s revenues are derived from its US and European fibre cement operations, with the remaining 23% coming from the Asia Pacific region.
Source: Annual report
A key factor influencing James Hardie’s reported net profit are the adjustments required due to the company’s asbestos liability. These are primarily derived from calculations by actuaries, so shouldn’t fluctuate widely – but can. As an example, in 2014, actuarial estimates increased by US$308 million. That doesn’t affect James Hardie’s underlying results, but it’s an issue to be aware of.
At the current price of around $18.21, James Hardie is trading on a trailing P/E ratio of around 21x and paying a dividend yield of 4%, unfranked.
|Market cap (A$m)||2,816||2,077||4,445||1,725||4,835||7,943|
|P/E ratio (x)||16.4||20.5||26.9||13.7||17.3||20.9|
|Dividend yield (%)||3.9%||3.0%||2.5%||5.8%||4.4%||4.0%|
Source: Annual reports
Here’s the summary table of the six building materials companies covered in this article. This is not normally a sector I’d consider. High P/Es, cyclical stocks, capital intensity, high levels of debt and low dividend yields generally mean there are far better options available in other sectors.
Of the companies above, I’d probably consider a closer look at Adelaide Brighton, Brickworks and CSR.
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Motley Fool contributor Mike King owns shares in TPG Telecom. You can follow Mike on Twitter @TMFKinga
The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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