Adelaide Brighton share price crashes lower on surprise profit downgrade

Unfortunately for its shareholders, the Adelaide Brighton Ltd (ASX: ABC) share price is on course to have a disappointing finish to the week.

In early afternoon trade the integrated construction material and lime producing company’s shares are down 8.5% to $4.71.

At one stage the company’s shares were trading 10% lower at a 52-week low of $4.64.

Why have Adelaide Brighton’s shares crashed lower today?

Investors have been heading to the exits in their droves today after the company released a market update.

According to the release, it expects underlying net profit after tax, excluding property, for the year ending December 31 2018 to be between $188 million and $195 million.

This compares to the underlying net profit after tax of $190.3 million that it posted in the prior year.

It is also a downgrade on the full year guidance that it provided when it released its half year results in August. At that point management advised that it expected full year underlying net profit after tax, excluding property, to be in the range of $200 million to $210 million.

What caused the downgrade?

The company has blamed the slower than expected ramp up of a major South Australian infrastructure project for the downgrade.

Managing director, Martin Brydon, said, “While performance of the business has generally been pleasing, a number of factors have led to demand in the second half being slightly lower than anticipated. The ramp up in a major South Australian infrastructure project has been slower than expected in the current year, however overall project volumes are on forecast.”

In addition to this, Mr Brydon advised that the Western Australia market was not as strong as expected, nor was the recovery from adverse weather conditions in the east coast markets.

Should you buy the dip?

This decline has left Adelaide Brighton’s shares trading at around 17x earnings. If this proves to be a one-off then its shares are probably fair value now, but if this is the start of a cyclical downturn then I can see them being derated lower.

Because of this, I would suggest investors wait to see how it performs in the first half of FY 2019 before considering an investment.

In the meantime, I would sooner buy the shares of BHP Billiton Limited (ASX: BHP) or Rio Tinto Limited (ASX: RIO).

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Motley Fool contributor James Mickleboro has no position in any of the 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 Scott Phillips.

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