The Adelaide Brighton Ltd. (ASX: ABC) share price is recovering from a weak open after the cement and lime supplier’s half year profit swung to a loss.
The news shouldn’t have shocked investors the second time around given that management had issued this profit warning a month ago.
The Adelaide Brighton share price shed 5 cents in early trade but is trading 1 cent higher at $3.14 during lunch time trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is inching up 0.1%.
Positive sentiment towards the industry could be giving the ABC share price a much-needed boost. Even the dog of the sector, the Boral Limited (ASX: BLD) share price, is bouncing back with a 6.1% jump to $4.32 after its big drubbing on the back of its disappointing outlook as the CSR Limited (ASX: CSR) share price added 0.9% to $4 and James Hardie Industries plc (ASX:JHX) share price increased 0.2% to $22.48 at the time of writing.
Big swing to net loss
Adelaide Brighton reported a 6.3% drop in interim revenue to $755.7 million and a net loss of $17.9 million compared to a net profit of $84.5 million in 1HFY18.
You can blame the ongoing slowdown in domestic demand for construction material for the bad result. The number of Australian residential construction approvals fell b a quarter on seasonally adjusted terms for the six months to June 2019.
The outlook isn’t great either as residential construction is tipped to continue to decline until 2021 before returning to growth.
Management is counting on mining and infrastructure construction to offset the weakness for its products in the near-term.
Light at the end of the tunnel?
It is trying to convince investors that it too can benefit from the surging gold price as that should spur precious metal miners to spend more on project development while nickel capacity expands due to the bullish outlook for the commodity.
If that comes to pass, demand for cement and lime in Western Australia and the Northern Territory should increase. But this assumes miners don’t use their strong cash flows to prioritise acquisitions over capex.
State and federal government’s commitment to spend big on infrastructure is also seen as a positive by Adelaide Brighton. There are a significant number of building projects that are scheduled to start and this should translate to stronger sales for the company in 2020.
In the meantime, it will be a nervous wait for shareholders given that the second half of 2019 looks bleak.
The benefits from the company’s cost cutting program also won’t be felt until 2020 and management is forecasting 2019 full year underlying net profit to range between $120 million and $130 million.
This compares to Adelaide Brighton’s 2018 net profit of $191 million.
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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.