On Thursday, leading cement and lime manufacturer Adelaide Brighton Ltd (ASX: ABC) released its 2017 half-year results. The integrated producer of cement, lime, clinker and other construction products reported softer-than-expected earnings after one-off costs and quality issues dragged profits lower.
However, Adelaide Brighton’s share price rallied higher following the announcement with the market focusing on a bigger thematic at play.
Here’s what happened.
Adelaide Brighton’s results
To recap, Adelaide Brighton revealed statutory net profit after tax (NPAT) fell 10.9% to $68.7 million for the half. After removing one-off rationalisation and transaction costs of $5.8 million, underlying NPAT came in at $74.5 million – down 4% on the prior corresponding period.
Pleasingly, revenue grew 4.7% to $718.4 million, supported by Adelaide Brighton’s recent acquisition of Central in Victoria. Excluding the incremental revenue from this acquisition, Adelaide Brighton’s pre-existing operations revenue grew 1.3%, buoyed by robust demand in New South Wales, Victoria, Queensland and South Australia.
Despite a poor set of headline numbers (in my opinion), the market seemingly cheered the results by driving Adelaide Brighton’s share price over 3% higher during intraday trade to trade near all-time highs.
The underlying cause of this bounce appears to be optimism around the company’s 2017 full year and forecast FY18 results after CEO Martin Brydon said “full year . . . sales volumes of cement and clinker [are expected] to be higher than in 2016”.
This comment was based on the fact that Adelaide Brighton had a strong finish to its first half of 2017, with the backdrop of a very strong Sydney and Melbourne construction market providing all indications of solid momentum going forward into 2018.
What should you do now?
If Adelaide Brighton’s optimism is anything to go by, it’s safe to say that stocks exposed to construction activity like Fletcher Building Limited (Australia) (ASX: FBU) , CSR Ltd (ASX: CSR) and Boral Limited (ASX: BLD) are in for a treat if the existing residential and commercial construction boom on the east coast of Australia continues.
However, whilst a positive economic backdrop is one thing, the price of a stock is another. In this regard, whilst both Fletcher Building and CSR trade at a price-earnings ratio well below that of Adelaide Brighton’s forecast 25x (based on Thursday’s results), I believe Boral’s share price is beginning to look slightly expensive.
Boral’s most recent closing price of $6.89 places it on a trailing price-earnings of about 23x.
Whilst this figure does not take into account incremental earnings (or future growth prospects) flowing from Boral’s Headwaters Inc acquisition completed in May this year, the higher price means Boral’s share price carries more downside risk (compared to peers CSR and Fletcher Building) in the event there is a slowdown in Australian construction.
Whilst the Headwaters acquisition provides some insulation from Australia by diversifying earnings through America, it also carries implementation and geographic risks which should be factored in. This is something we will only know in due course.
Admittedly, the price-earnings ratio isn’t the only thing investors should look at when deciding whether to buy or sell a stock. Factors like industry fundamentals, the economic backdrop, and a company’s potential are all also relevant.
Accordingly, though Boral’s share price remains slightly expensive in my opinion, I recommend investors wait for Boral to release its full-year results later this month for an update on the integration of its Headwaters acquisition before deciding to buy or sell the stock.
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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. 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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