The new Coalition government is pushing infrastructure spending as its ticket to growth, and big infrastructure players will be the big beneficiaries.
Incoming Treasurer Joe Hockey says construction will provide the next boom for the Australian economy. “We need to have cranes over cities: we need to have cranes around the country,’ he says (while infrastructure may boom, tourism certainly won’t).
The ASX Materials Sector has been hurt by a slowdown in residential construction and mining expansion, however recent figures from the Australian Bureau of Statistics (ABS) showed a quarter over quarter increase of 8.4% in detached housing starts and a 13.1% uptick in other dwelling construction starts, primarily units and townhouses.
Commsec economist, Craig James, believes ”the latest housing finance data has shown that home construction is set to soar over the coming year.”
First time home buyer credits and dropping interest rates may well fuel a housing boom, but not all experts agree. The infrastructure projects planned have some hurdles to overcome.
The initial thrust of the government’s infrastructure push appears to be focused primarily on roadways. For example, Infrastructure Australia’s (IA) latest cost benefit priority list does not include all the Coalition’s roadway plans but does include the Melbourne Metro Rail project, which has been scrapped. In addition, environmental advocacy groups are likely to take a dim view of construction cranes popping up all over Australia!
Nevertheless, it is likely some kind of increased infrastructure spending will happen, which is a boon for Materials stocks.
|Share Price||52 Wk %Change||Div Yld||1 Yr Totoal Sharholder Return||5 Yr Shareholder Return||2 Yr Growth Forecast Earnings/Dividend||P/E (Forward-2015)||P/B (MRQ)|
|Fletcher Building Ltd (FDU)||$8.63||+55%||3.7%||60.7%||13.8%||31.2%/20%||12.15||2.03|
|James Hardie industries (JHX)||$10.90||+26%||1.9%||31.1%||19.3%||86.6%/-20%||22.24||N/A|
|Boral Ld (BLLD)||$4.91||+27%||2.5%||30.9%||-0.9%||38%/24.5%||15.84||1.10|
|Adelaide Brighton Ltd (ABC)||$3.60||+20%||+4.6%||25.4%||9.2%||2%/3.7%||14.4 (FP/E 2014)||2.22|
|Brickworks Ltd (BRW)||$12.85||+28%||3.1%||31.4%||5.2%||13%/1||19.18 (F/PE-2014)||1.08|
|CSR Limited (CSR)||$2.46||+54%||2.7%||61.6%||-11.8%||65.6%/57.2%||–||1.2|
|Schaffer Corporation (SFC)||$5.20||+40%||4.4%||47.5%||3.2%||–||–||1.13|
With a market cap of $5.9 billion New Zealand based Fletcher Building Limited (FBU) is the largest stock in the table. The company offers a range of infrastructure construction and building materials products across the globe with approximately 40% of its revenue generated in Australia and another 40% in New Zealand. In its recently released Full Year 2013 annual report, management cited deteriorating conditions in residential and commercial construction in Australia coupled with the slowdown in mining sector construction as explaining the 22% drop in earnings from its Australian operations.
In a pre-election interview the CEO of Fletcher Building speculated that Australia’s construction market could continue to lag beyond the election. In addition, the CEO does not see growth in the coming decade matching the previous one due to softening resources demand.
Nevertheless, the company has rewarded shareholders with healthy total returns over 1 and 5 year periods and boasts attractive growth forecasts from analysts. The stock has rebounded substantially this year and the latest results show 38% growth in New Zealand operations. BA Merrill-Lynch has a medium risk BUY rating on FBU, noting the stock is cheaper than rivals James Hardie Industries (JHX) and Boral Limited (BLD). Here is a two year price performance chart showing FBU outpacing the ASX Materials Sector Index, the XMJ:
James Hardie Industries (JHX), market cap of $4.8 billion, was hit hard by the collapse of the US housing market as well as the strong Australian dollar. Note that while its one year total shareholder return is outstanding, the five year average is negative. Hardie makes fibre cement products for residential and commercial construction and therefore would not benefit much from road building. However, the company has benefited from the slow but steady recovery in the US housing market where it generates about 80% of its revenue, as well as from the weakening Aussie dollar. On 17 September BA Merrill-Lynch upgraded JHX from NEUTRAL to BUY based on the long term prospects of the US recovery and the weakening AUD.
In Hardies’ recent earnings release for Q1 2014 management stated that its Australian operations would unlikely see “substantial increase in net sales in FY2014”. The company sells more of its products in detached home construction than in multi-unit housing. Should a regional Australian housing boom come to pass, JHX would benefit. However, there is hardly universal agreement amongst experts and analysts as to the future of residential construction in Australia.
However, analysts’ 2 year earnings forecast of 86.6% for Hardie is attractive. Over a two year period the share price has appreciated about 100%, crushing the lackluster performance of the sector. Here is the chart:
Boral Limited (BLD) is another Australian company that generates 11% of its revenue from the US. The company makes construction materials and cement products needed for road building as well as gypsum plasterboard and other materials used in residential housing construction.
On 21 August Boral reported Full Year 2013 earnings, which showed a $212 million dollar loss compared to a profit of $177 million in FY 2012. The loss included significant items and without them underlying profit came in at $103 million, in line with guidance. The share price is still well short of its 52 week high. Yet the company’s stock is still up close to 50% over the last two years. Here is the chart:
What should be especially troubling to investors is Boral’s declining profitability in the USA, despite the modest housing recovery there. Boral management expressed confidence US operations would return to profitability in the second half of 2014. Major analysts are skeptical with CIMB Securities, Macquarie, Citi, and BA-Merrill Lynch with UNDERPERFORM or SELL recommendations. Even UBS, with a BUY rating, doubts Boral will reach break-even in the US in 2014. What’s more, BA-Merrill Lynch is throwing cold water on the punt that home construction in Australia will rally, claiming its view sees no “macro tailwinds for the time being.” A recent report noted rival CSR Limited (CSR) might be looking to buy Boral’s brick and tile operations.
Adelaide Brighton (ABC) may be the one to watch should those major roadway projects materialise. The company makes cement and cement related products vital to road construction. On 21 August the company released Half Year 2013 results, showing a record revenue for its Half Year performance of $579.3 million, a 4.5% year over year increase. Underlying net profit was up 2.9% and the company announced an interim dividend of $0.75 per share. Adelaide’s dividends are fully franked, and while a 4.7% annual yield is attractive, the company also has the weakest analyst growth forecasts.
The Materials Sector companies are largely energy intensive and Adelaide estimated that the carbon tax could lower the company’s FY 204 profit by $2 to $6 million dollars. While analysts are acknowledging the benefit of a carbon tax repeal, few seem to have much to say about the road infrastructure plans. Yet Adelaide reported it generated 5% of its total revenue from resource and mining projects in Western Australia and the Northern Territory as well as infrastructure in South Australia. Unfortunately there is no breakdown of mining/resources revenue versus infrastructure. But the future of infrastructure spending is potentially robust with the Coalitions ambitious plans for roadways.
In reality the final figure would be well over $11.06, factoring in state government and private sector investment. Should these projects come to pass, it is hard to imagine how a cement company like Adelaide Brighton would not benefit. Here is a two year price chart for ABC compared to the XMJ:
Brickworks Limited (BKW) has three operating segments – Building Materials, Property, and Investments. With a market cap of $1.96 billion, the company is smaller than the first four stocks in the table. Its building materials segment provides products primarily for residential and commercial construction so this stock is less likely to benefit from road building projects.
However, the company has performed well and has reasonable growth estimates. And remember, few analysts are including a significant recovery in housing construction in those estimates. Despite difficult market conditions, Brickwork shares are up about 35% over two years. Here is the chart:
On 19 September Brickworks announced Full Year 2013 results and they were solid, to say the least. Revenue rose 8.9% and net profit after tax (NPAT) was up 29.6%. It should be noted that the company’s EBIT (earnings before interest and tax) were largely driven by a 161% increase in the Property and Investment Segments, but the Building Materials actually increased by 14.9%, despite the sluggish construction market.
CSR Limited (CSR) provides building materials in Australia and New Zealand. The company also has a Property Investments Division and is a joint venture partner in an Aluminum operation. The building materials are residential in character, including branded products such as energy efficient Viridian™ glass, Bradford™ insulation and lightweight Hebel® concrete. Over the last two years the stock price has struggled, only recently going positive over that time frame. Here is the chart:
On 13 May the company announced FY 2013 Full Year results and they were hardly stellar. Revenues declined 7% and NPAT went from a profit of $76.3 million in FY 2012 to a loss of $146.9 million in 2013. The loss was largely attributable to an asset revaluation of the Viridian glass operations along with sagging aluminum prices that led to a 38% decline in that business segment.
Despite this, the chart shows the share price has actually risen since the annual report was released. UBS is alone among major analysts with a BUY rating on CSR. Among the reasons cited are the declining AUD and the substantial impact the analyst feels the repeal of the carbon tax could have.
The final stock in the table, Schaeffer Corporation (SFC) could be a punter’s dream. In size it is a small cap with a market value of only $73.8 million and a daily trading volume of 8,600 shares. In contrast CSR with a market cap somewhat larger at $1.2 billion trades on average around 2 million shares per day. But SFC sports a big cap share price and a healthy dividend of 4.4%, now fully franked.
The company has three business segments – Property Investment, Automotive Leather, and Building Materials. The primary reason for the punt is the company’s subsidiary, Delta Corporation, which makes a line of pre-cast and pre-stressed concrete elements, ideal for roadways and bridges. The company has seen an increase it NPAT every year for the last three, despite a slight revenue decline in FY 2013.
Schaffer’s stock price is up 60% over the last two years. Here is the chart:
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