These ASX All Ordinaries shares have the greatest margin risks from surging inflation: UBS

Several ASX shares could be at risk from the threat of higher inflation.

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Key points

  • Most ASX companies have so far been able to pass on rising costs to their customers but their ability to lift prices further may be waning, according to UBS 
  • This could be a problem for several ASX All Ordinaries shares as inflationary pressure could persist for a while yet 
  • UBS warns that the ASX shares most at risk are in the building materials and food sectors 

The inflation threat that’s rocking global markets is unlikely to go away soon and that will put several ASX shares on the S&P/ASX All Ordinaries Index (ASX: XAO) at risk of a margin squeeze.

The warning comes from UBS as it pointed out that businesses are facing record levels of cost inflation.

ASX All Ordinaries shares resisting inflation pressure

The good news is that most ASX shares can weather the storm and we are already seeing signs of this.

UBS commented:

When we look at how input and output prices have been evolving through the cycle, we still see a picture that broadly supports margins being maintained.

Over the last 18 months, the pricing power beta measure has been showing that companies are upping their sales prices comfortably, even as they report intensifying input costs.

This was evident during the February profit reporting season. There were many examples of ASX All Ordinaries shares easily passing on higher costs to their customers due to strong underlying demand.

Higher input costs yet to be a big threat

It helps that consumers and companies are flushed with cash, and therefore able to stomach rising prices, according to UBS.

On the other hand, companies that can absorb inflationary pressure have the opportunity to win market share.

The broker added:

We surveyed our team of stock analysts across the sectors where COGS inflation is relevant. Aggregating together responses on more than 80 identified companies, we found that freight / shipping costs were most commonly cited as a current input cost concern.

Rising prices of oil and agricultural products were also heavily mentioned as having a meaningful impact on operations. In contrast to many offshore equity markets, rising prices of semiconductors and chips was not a widespread concern for Australian companies.

How long can ASX companies hold out?

But the ability for ASX All Ordinaries shares to lift prices might be waning. UBS noted that the business cycle might be maturing and the peak in margin cyclicality has passed.

This doesn’t mean that all ASX shares are going to face a margin squeeze. This is going to be a case-by-case story. The broker highlighted several that it believes will struggle to pass on the rising cost of goods.

ASX All Ordinaries shares most exposed to inflation risks

This includes ASX building material suppliers like the Adbri Ltd (ASX: ABC) share price, Brickworks Limited (ASX: BKW) share price and Boral Limited (ASX: BLD) share price.

UBS also reckons that food companies like the Collins Foods Ltd (ASX: CKF) share price, Inghams Group Ltd (ASX: ING) share price and Costa Group Holdings Ltd (ASX: CGC) will feel the squeeze.

Other price takers that could suffer are the AMA Group Ltd (ASX: AMA) share price, Kogan.com Ltd (ASX: KGN) share price and Redbubble Ltd (ASX: RBL) share price.

Motley Fool contributor Brendon Lau has positions in COSTA GRP FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Brickworks, Collins Foods Limited, Kogan.com ltd, and REDBUBBLE FPO. The Motley Fool Australia has positions in and has recommended Brickworks and Kogan.com ltd. The Motley Fool Australia has recommended COSTA GRP FPO and Collins Foods Limited. 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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