The Adelaide Brighton Ltd. (ASX: ABC) share price crashed to a four-month low this morning after the cement supplier posted a big drop in earnings and slashed its dividend.
The stock slumped 4.5% to $2.90 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index tumbled 2% on growing fears of a coronavirus pandemic.
Adelaide Brighton isn't the only one in the sector that is being sold off. The James Hardie Industries plc (ASX: JHX) share price and Boral Limited (ASX: BLD) share price lost over 2% each at the time of writing.
Operating leverage hurts more on the way down
Adelaide Brighton is worse for wear after it revealed a 31.8% slump in underlying earnings before interest and tax (EBIT) to $186.4 million as revenue fell 7% to $1.5 billion for the year ended December 31, 2019.
The bigger drop in earnings reflects its operating leverage. The business' bigger fixed cost base exaggerates the bottom line versus the top line.
Costs pressures and big dividend cut
Management blames rising costs for the damage. These costs related to raw materials, transport, fuel and shipping.
Volumes are also being hurt by competition as the number of residential construction projects fell.
In the face of these pressures, management took an axe to its final dividend. It declared a final dividend of 5 cents a share compared to the 11 cents it paid last year. The drop in the ordinary dividend for the full year is even starker since the company didn't pay an interim dividend in 2019. Total ordinary dividends fell from 20 cents in 2018 to 5 cents.
Where's the residential property boom?
"In 2019, construction materials markets softened on the eastern seaboard of Australia, particularly in Queensland and New South Wales – driven by an oversupply of multi-residential dwellings, and a reduction in general consumer confidence," said the company's chief executive Nick Miller.
"In response to cost pressures, the Group is well advanced with a major cost-out initiative to ensure a long-term sustainable platform for future growth, and consolidating our strong market position in lime, cement and clinker, concrete products and aggregates."
Little good news
It doesn't help that there's little in the way of good news in the results even if you tried to read between the lines! Just about all parts of business recorded falls. Cement sales dropped even though demand in Western Australia stabilised.
The group's concrete and aggregates division results were also soft, driven largely by Victorian, New South Wales and Queensland. Earnings from concrete products fell by $3.7 million in the period on weaker residential and commercial construction markets.
The second half outlook won't give investors much reason to smile either. Net profit in 2020 is tipped to fall 10% from 2019.
Any turnaround won't come for at least another 10-12 months. So much for the infrastructure building boom…
