Adelaide Brighton unwinds along with housing construction

06/08/2019

Building products supplier Adelaide Brighton has become the latest victim of the recent unwinding of housing construction in Australia, cutting its full year profit forecasts by nearly 30 per cent, according to a recent Sydney Morning Herald report.

Adelaide Brighton has blamed, “further softening of conditions in the residential and civil construction markets” for a substantial drop in its 2019 net profit forecast, while also recently revealing a $100 million non-cash impairment, according to the report.

In a need to conserve capital, it has also scrapped its interim dividend. The company now expects profit to between $120 million and $130 million, down from $190 million a year earlier.

One-off shipping costs from a redirected cement import order in Victoria, competitive pressures in Queensland and South Australia, and price hikes in raw materials were hurting its bottom line, Adelaide Brighton said in the report.  

“We are operating in a fairly challenging market at the moment. Whilst the guidance is very concerning, the company remains well within its banking covenants,” Adelaide Brighton Chief Executive Nick Miller said in the Herald Sun report.

The downward revision should not have surprised investors given figures released this week revealing new housing approvals had slumped to a six-year low over the year to June. Total approvals dropped by a fifth in the 2019 financial year.

Other buildings supply businesses were also marked down by investors in early trade, with shares in building behemoths, Boral and CSR, falling between seven and eight per cent in sympathy.

However, confidence among Australian home buyers has been showing recent signs of a recovery, according to the report, with prices bottoming out and auction clearance rates rising, but the improvement has not “come through to delivery on the ground,” Mr Miller said.

About 60 per cent of the challenges faced by the company could be attributed to the state of the housing market, the remainder were internal issues, he said.

The sharp deterioration in housing approvals “will weigh on construction activity levels through to 2020,” according to JP Morgan Analyst Brook Campbell-Crawford.

CSR and Adelaide Brighton are the most heavily exposed building suppliers. Around 53 per cent of CSR’s and 32 per cent of Adelaide Brighton’s revenue comes from the sector.

Another analyst report from Morgan Stanley suggests the real impact of the housing downturn is yet to be felt.

“Australian residential exposed building materials stocks have enjoyed a post-election bounce that we believe has come too early and ignores the pain yet to come in the group,” the report’s lead writer Andrew Scott said.

The worst of the downturn will hit this financial year and activity will not trough until late the following financial year in 2021, he said.