Top Gainer: Adelaide Brighton (ABC)

 Closing price  $2.66
 Change  +0.10
 % change  +3.9%


Adelaide Brighton (ABC), a supplier of cement and lime to the construction, engineering and infrastructure and resource sectors in Australia with 1,600 employees, was today’s biggest gainer, rising 3.9% after it flagged a solid full year result despite a dip in first half profit amid weakness in the housing sector.

The company expects 2011 net profit to be similar or slightly lower than last year, even as construction markets worsen from already weak levels, according to managing director Mark Chellew. The company expects full year net profit of between $144 million and $152 million, compared to $151.4 million for calendar 2010. “We’re still confident enough to give guidance even with the worsening residential outlook over the last three months,” Chellew said.

While it maintained a Buy recommendation, UBS recently reduced its price target from $3.70 to $3.35 and stated that it preferred exposure to CSR and BLD in the sector. UBS expects weakness in housing to continue over the next six months and its forecasts and price targets right across the sector have been lowered.

And housing has indeed been slowing, with a whiff of a more serious drop in the air. Consumer confidence and spending is down; and there is a tiny glimmer of evidence our exploding home prices are flattening and in a few areas, even decreasing.

In fact, the latest RP Data home value index shows a 2.7% decrease in housing prices in the first five months of 2011. Additionally sales volumes in real estate were about 25% below the five-year average, while the number of listings was up 25% on last year. All ominous signs. “Despite the low rate of unemployment and the strength of the resources sector, it is clear that the average Australian is content to pay-down debt and wait for some economic certainty to return,” RP Data research director Tim Lawless said.

Housing slowdown aside, ABC’s bottom line is also at threat from the proposed carbon tax. Subject to parliamentary approval, the Labour/Greens government’s proposed two-stage plan for a carbon price mechanism will commence this year. The plan is for a flat price to apply for three to five years, before moving to a market traded price.

Elaine Prior analyst with Citi estimates that it is heavy industry that is most exposed to a carbon tax. She expects the biggest carbon impacts to be on companies like Adelaide Brighton, accounting for a reduction of 3.3 per cent of net profit in full year 2013.

The magnitude of any carbon tax depends on both the cost-per-tonne, and the level of compensation that trade-exposed industries receive. Much of the devil will be in the policy detail, notably around the level of free permits to “emissions intensive trade exposed” industry (EITEs) like steel, cement and aluminium, since prices are set on international markets. According to a recent analysis of power supply contracts, the energy market is pricing in a 50 per cent chance that a carbon price will not be in place by the middle of next year as planned.

Based on Thomson Reuters data, five analysts have a buy on ABC, three have an outperform and seven have a hold. 


Chart: Share price over the year to 06/07/2011 versus ASX200 (XJO)

Stock code: ABC

Charts: Adelaide Brighton Limited

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