Adbri: Initiating Coverage. Headwinds in Housing Construction Likely and Stock Screens as Overvalued

We initiate research coverage of Adbri, with a fair value estimate of AUD 1.90 per share. Shares currently trade at about a 45% premium to our valuation, on a P/E ratio of 12. We do not expect dividends in fiscal 2023 given a stretched balance sheet, but from fiscal 2024 we expect a return to fully franked dividends averaging a 6% yield over the 10 years to fiscal 2032. We expect operating margins and return on capital will not return to historical levels given increasing price competition from imported clinker, a key input in cement production. This affects Adbri as a domestic producer as it needs to compete with low-price imports. Firm earnings are derived from the segments of nonresidential and engineering, residential, and mining, comprising 50%, 35%, and 15% of fiscal 2022 revenue respectively.