Building industry woes and ASX 200 materials shares: What investors need to know

ASX building supplies companies have endured a challenging 18 months. Could it be time to buy?

A person smashes a wall with a hammer, sending bricks flying.

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Key points

  • It's been a challenging 18 months for building supplies companies within the S&P/ASX 200 Materials Index
  • Several ASX 200 materials shares have fallen significantly over this period 
  • But tailwinds for the housing sector may be coming amid slowing inflation and interest rate hikes 

S&P/ASX 200 Materials (ASX: XMJ) shares are rising today, up 0.49% in early afternoon trading, while the S&P/ASX 200 Index (ASX: XJO) is up 0.44%.

Among the ASX 200 materials shares are several large companies providing building materials like timber, cement, fencing, and bricks.

Some of the big names are James Hardie Industries plc (ASX: JHX), Boral Limited (ASX: BLD), Brickworks Limited (ASX: BKW), and CSR Limited (ASX: CSR).

And boy, have they taken a hammering (get it?) over the past 18 months.

What's going on with ASX 200 materials shares?

Here's how the share prices of these ASX building companies have performed over the past 18 months:

  • The Boral share price is down 39%
  • The James Hardie share price is down 32%
  • The CSR share price is down 7%
  • The Brickworks share price is down 3%.

Worst of the bunch is cement manufacturer Adbri Ltd (ASX: ABC). Its shares fell by a staggering 48%. The company lost its place in the ASX 200 materials shares index in the most recent re-balancing.

The building sector has had numerous challenges over this period. These included disrupted global supply chains, which caused a shortage of imported building materials and raised their prices.

Many builders have also had trouble hiring and retaining tradies amid historically low unemployment.

Several building companies have collapsed. Many had too many fixed-price contracts signed before 2022, when inflation began rising, and supplies and labour became more costly.

All of this contributed to delays in building activity.

Bureau of Statistics data released this week shows there was a 15% decline in new home builds, and a 34% decline in apartment builds in the December 2022 quarter compared to the December 2021 quarter.

Why is building activity slowing down?

Master Builders Australia chief economist Shane Garrett said a large number of new homes were under construction (almost 240,000), but there were fewer new projects in the pipeline.

Garrett said:

Higher-density home building has sunk to its lowest level in a decade at a time when inward migration is soaring to unprecedented levels. This combination is likely to further exacerbate rental market pressures.

Slowing building activity is a problem given the construction industry is a significant employer in Australia, and we have a woefully undersupplied housing market already.

This is one reason why rents have risen at more than 10% per annum nationally over the past year.

And, of course, slowing activity is not good for building companies among the ASX 200 materials shares.

The global supply disruption made it hard for these companies to maintain stock levels, meaning they missed out on sales.

Now that those supply chain issues have been somewhat resolved, building activity is decidedly lower, resulting in less demand for their goods.

Are things looking up?

Global supply chain issues have been somewhat resolved, but finding and retaining labour remains hard.

However, inflation is now falling in both Australia and the United States, where some of these companies have significant businesses. As a result, this period of interest rate hikes is potentially nearing an end.

This bodes well for the housing market, especially given values have pulled back significantly in Australia. This could provide tailwinds for construction in the not-too-distant future.

As we know, share markets look forward, not back.

Several experts are suggesting it is time to buy some of these beaten-down ASX 200 materials shares. Here are a few broker opinions.

Buy these ASX 200 materials shares now, say experts

Wilsons equity strategist Rob Crookston recommends buying James Hardie shares, which are trading up 1.2% to $33.43 per share today.

Crookston says:

There are strong structural tailwinds behind the US and Australian housing markets. We view James Hardie as an attractive investment at this juncture.

We think James Hardie is well placed to take advantage of market softness to strengthen its market position and drive further profitable volume share gains.

James Hardie currently trades on a price-to-earnings ratio (PE) of 17x, which is 1 standard deviation below its 10-year average.

Last month, Morgans retained its add rating on Brickworks shares with an improved price target of $26.25.

The broker says the Brickworks share price (currently up 1.7% to $23.46) represents a sizeable discount to the company's net tangible assets (NTA), which it estimates are worth $35 per share.

Wilson senior equity analyst Sam Koch is backing Boral shares for growth in 2023.

Koch says:

Their new CEO Vik Bansal, we think, is a great fit. He has the operational capability to deliver a turnaround plan. We believe there's a materially better outlook for this business versus its peers.

Motley Fool contributor Bronwyn Allen has positions in James Hardie Industries Plc. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Brickworks. The Motley Fool Australia has positions in and has recommended Brickworks. 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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