Company Reports

We downgrade our stand-alone fair value estimate for no-moat Adbri by 5% to AUD 1.90 per share on the termination of lime supplies to large customer Alcoa from April 2024. We downgrade 2024 lime volume forecasts by about 100,000 metric tons and 155,000 metric tons from 2025. Our 2024 EBITDA forecast is AUD 313 million, from AUD 316 million previously. However, only eight months of this year have been hit. Our EBITDA forecast from 2025-33 averages about 8% lower. The lime business will continue operating at lower capacity, but a high fixed-cost base is likely to weigh on near-term margins. Our midcycle EBITDA margin is 15%, from 16% previously. Our forecasts for other segments are unchanged.

Adbri focuses on operational synergy by vertically integrating the supply of raw materials with the production and distribution of construction materials. Additionally, the firm targets operational efficiency, aimed at constantly improving the business’ cost position.

Adbri’s 30% bump in fiscal 2023 underlying EBITDA was underpinned by strong pricing, cost savings, and modest volume growth in cement, concrete, and aggregates. Underlying EBITDA of AUD 311 million was at the lower end of guidance of AUD 310 million-AUD 315 million and AUD 1 million ahead of our expectations.

Adbri’s focuses on operational synergy by vertically integrating the supply of raw materials with production and distribution of construction materials. Additionally, the firm targets operational efficiency, aimed at constantly improving the business’ cost position.

Narrow-moat CRH and Barro Group have made a nonbinding indicative proposal to acquire all Adbri shares that the two firms do not already own. The cash offer in the form of AUD 3.20 per share implies a 41% premium to Adbri’s closing price on Dec. 15, 2023, and a 60% premium to our stand-alone fair value estimate of AUD 2.00 per share. CRH is the largest producer of aggregates and asphalt in the United States and also has operations in Europe. It does not currently have any significant businesses in Australia.

Adbri’s focuses on operational synergy by vertically integrating the supply of raw materials with production and distribution of construction materials. Additionally, the firm targets operational efficiency, aimed at constantly improving the business’ cost position.

We raise our fair value estimate by 5% to AUD 2.00 per share for no-moat Adbri. The company provided an update on the Western Australian Kwinana upgrade project, with fiscal 2023 capital expenditure expected to be about 7% less than previous estimates at the midpoint. Additionally, the company updated earnings guidance. It now expects full-year fiscal 2023 underlying EBITDA of AUD 310 million to AUD 315 million given strong product demand. We lower our fiscal 2023 and 2024 capital expenditure forecasts and lift our fiscal 2023 EBITDA forecast to AUD 310 million from AUD 308 million. Adbri’s share price has risen about 10% since the update and we think it is slightly overvalued now.

Adbri’s focuses on operational synergy by vertically integrating the supply of raw materials with production and distribution of construction materials. Additionally, the firm targets operational efficiency, aimed at constantly improving the business’ cost position.

Adbri’s share price has flatlined in recent months after a sharp fall in late August following its first-half fiscal 2023 result. We think the market underestimated the cyclicality in the residential housing sector, which contributes about one-third of group revenue. Nonetheless, we view this as a temporary headwind and expect a recovery in residential construction demand from fiscal 2025, driven by an undersupply of Australia’s existing housing stock. In the near term, earnings growth is expected to come from pricing increases, with volumes in concrete, cement, and aggregates flat over fiscal 2023 and 2024. In the smaller segment of lime, we expect declining sales volumes given import competition and the loss of a major customer in 2021. Shares in no-moat Adbri are fairly valued with our fair value estimate of AUD 1.90 per share maintained.

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.

Adbri’s focuses on operational synergy by vertically integrating the supply of raw materials with production and distribution of construction materials. Additionally, the firm targets operational efficiency, aimed at constantly improving the business’ cost position.

As foreshadowed in our note on Oct. 12, 2021, we cease coverage on Adbri. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to client demand, investor interest, and staffing. The break in coverage of Adbri is likely to be temporary and we look to reinitiate on the company in the future.

We place our fair value estimate on Adelaide Brighton, or Adbri, under review and notify clients of our proposal to temporarily cease coverage in late October 2021. We intend to reinitiate coverage at a later date. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to client demand, investor interest and staffing.

Policymakers are increasingly cognizant of the significant contribution from the manufacturing processes, transport and disposal of building materials to the carbon-intensity of our built environment. Assessing the associated degree of carbon-risk associated with many building materials is a complex task—for detail, please see our special report “Combatting the Carbon Intensity of our Built Environment” dated July 27, 2021.

Following consideration of environmental, social and governance, or ESG, risks relevant to the construction materials industry, we make no change to our respective per-share fair value estimates of AUD 7.35 and AUD 3.15 for no-moat Boral and narrow-moat Adbri. Our medium uncertainty ratings for both stocks also remain unchanged. Carbon emissions represent the most significant ESG challenge to the industry, with cement and concrete production accounting for an approximate 5% of total global greenhouse gas, or GHG, emissions. This sobering statistic owes itself primarily to the ubiquitous use in the built environment, with extensive application found in the construction of residential and commercial buildings and in infrastructure. As a result, concrete is the most widely used architectural medium and the second-most consumed substance globally, after water. Despite the industry’s significant contribution to global GHG production, we expect concrete to remain omnipresent within the built environment into the future.

We're positive on the strategic direction of Adbri. The strategy focuses squarely on operational efficiency, the continued pursuit of greater vertical integration downstream into concrete and aggregates supply in all of Adbri’s markets, and growth of the Western Australia lime business. A persistent focus on operational efficiency aimed at constantly improving the business’ cost position is an imperative—in our view--for any business like Adbri, which is subject to cyclical profits.

The Australian Government’s targeted and highly effective fiscal support of the residential construction sector leads us to materially upgrade our near-term outlook for housing commencements and alteration and addition activity. Certainly, housing-related stocks under our coverage are set to benefit from the recovery in fiscal 2022, boosting earnings and improving balance sheet metrics. But with fiscal support for the sector now winding down, the valuation benefit of our upgraded near-term housing commencement forecasts to our housing-related coverage is modest at best.

We're positive on the strategic direction of Adbri. The strategy focuses squarely on operational efficiency, the continued pursuit of greater vertical integration downstream into concrete and aggregates supply in all of Adbri’s markets, and growth of the Western Australia lime business. A persistent focus on operational efficiency aimed at constantly improving the business’ cost position is an imperative—in our view--for any business like Adbri, which is subject to cyclical profits.

We make no change to our AUD 3.15 per-share fair value estimate for narrow-moat Adbri following the delivery of full-year 2020 net income of AUD 114 million. The result was AUD 13 million ahead of our forecast, owing to greater top-line resilience than we’d expected amid a difficult, coronavirus-marred year for the Australian construction materials industry. Cost-out initiatives also proved more effective than we’d anticipated. While we forecast a further contraction in operating income in 2021--owing to the previously announced loss of Adbri’s largest lime customer, Alcoa--our expectation for Adbri to benefit from an imminent recovery in residential construction activity remains unchanged.

We're positive on the strategic direction of Adbri. The strategy focuses squarely on operational efficiency, the continued pursuit of greater vertical integration downstream into concrete and aggregates supply in all of Adbri’s markets, and growth of the Western Australia lime business. A persistent focus on operational efficiency aimed at constantly improving the business’ cost position is an imperative—in our view--for any business like Adbri, which is subject to cyclical profits.