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One could make a case that roads, rails and other infrastructure projects have suffered over the past decade at the expense of the mining and LNG construction growth.  The following table presents that case.

Since 2004 Oil, Gas, Coal and Iron Ore have been gobbling up an increasing share of construction activity.  In addition to the existing shortfall in expansion of the non-resources and energy sectors, there is the question of population growth.  The following table shows a range of predictions.

At a 2010 conference on population growth, construction consultancy firm Davis Langdon boldly predicted investment in infrastructure needs in Australia to 2050 could reach $3.87 trillion dollars.  The company went on to comment:

•    ”The question of how big and how fast the population grows by 2050 is subject to various supply and demand scenarios, but either way the property and construction industry is destined for significant investment in new and upgraded infrastructure and public services.”

Eventually the reports and the political posturing at the national, state, and local level will actually yield some  projects.  Many ASX civil engineering and construction firms stand to benefit with contract awards.  But which ones?

There is another, perhaps less risky way to play the boom in infrastructure spending. Whatever construction firms emerge as winners will have a common need – building materials. ASX companies that sell the kinds of building materials required will benefit without the risk of bidding on major, and potentially controversial, construction contracts. Certainly there is the risk of competition from other suppliers, but that is arguably far less than the risks of jumping through regulatory hurdles to win major construction contracts.

The Infrastructure Audit identified Transport as the sector with the biggest need along with the biggest potential contribution to the nation’s GDP.  Specific areas needing attention include roads, rail corridors and terminals, port facilities, and airports.  

The following table includes 5 ASX listed companies that provide materials in the transport sector.  These companies are diversified by product with some diversified geographically as well.  All have proven track records of successful performance with matching positive records of shareholder returns.  All are dividend payers.  With one exception, all are large cap stocks with market caps ranging from $2 billion to over $5 billion.  Here is the table.

Company

(CODE)

Share Price

{52 Wk Chng}

Dividend Yield

Forward P/E

2 Year Earnings

Growth Forecast

 

2 Year Dividend

Growth Forecast

 

3 Year

 Total Shareholder Return

5 Year

Total Shareholder Return

Fletcher Building

(FBU)

$7.72

{-5%}

4.5%*

12.25

12.4%

9.4%

23.6%

8%

Boral Ltd

(BLD)

$5.94

{+13%}

2.9%

17.47

45.2%

28.3%

29.5%

7.8%

Adelaide Brighton

(ABC)

$4.58

{+37%}

3.8%

15.79

3.9%

9.5%

18.5%

17.4%

Schaffer Corp

(SFC)

$4.78

{-22%}

5.2%

15.2%

6.5%

 

Schaffer Corp Ltd (SFC) is a small cap stock with a market cap of only $67 million.  New Zealand based Fletcher Building (FBU) is the only stock that does not pay a fully franked dividend.  All five stocks have maintained or increased dividend payments in each of the last three years.

Based strictly on the numbers Boral Ltd (BLD) appears to be the least risky among the five.  The company has the highest total shareholder return over three years and the highest earnings and dividend growth forecasts.  Analysts, however, have a consensus Hold rating on Boral.

Boral may also be the most diversified of any of the stocks in the table, with both commercial and residential product lines offered in Australia, the US, and the Asia Pacific Region.  In the United States the company offers primarily residential construction projects.  In the Asia Pacific Region Boral is a 50% joint venture partner with US Gypsum and claims to be the leading supplier of plasterboard in the region.

In Australia, Boral claims to be our largest supplier of construction and building materials.  When you think roads, you think cement and asphalt and Boral has both.  The company also quarries of stone needed in road building and masonry products needed for bridge abutments.  

Boral reported Half Year 2015 Results in February and although total revenue dropped 2015, net profit after tax (NPAT) ballooned from a $23.6 million dollar loss in the first half of FY 2014 to a gain of $104.5 million this year.  Despite this, the share price dropped slightly as market participants apparently were unimpressed with the company’s cost cutting measures and the tailwind supplied by lower interest rates in Australia.  The price quickly recovered and has been rising since.  Here is a six month price chart for Boral.

Boral management believes the residential housing market in Australia will remain strong.  Investors may be concerned about the potential of a rise in interest rates in the US dampening the residential market there, but Boral management is not.  In the Half Year Release the company commented on the lack of infrastructure spending in Australia and stated it expects that to “pick up” in late 2015 or early 2016.

With a market cap of approximately $5.5 billion, New Zealand based Fletcher Building Ltd (FBU) is the largest stock in the table, but currently generates about 47% of its revenue from residential construction and only 12% from Australian infrastructure operations.  Management commentary in the recent Half Year Financial Report cites the decline in infrastructure and mining spending as challenging.   However, Fletcher’s subsidiary company Roca Pipelines has 46 facilities here in Australia manufacturing concrete and related infrastructure products.  Analysts have a consensus Outperform rating on the stock.

If you compare the three year shareholder return to the five year returns of the stocks in the table it appears all of these companies have benefited from an improving housing market in Australia.  Once infrastructure spending does rise, the companies with larger infrastructure operations, like Boral, should benefit more than the predominantly residential companies, like Fletcher.

Adelaide Brighton Ltd (ABC) is a company that stands to benefit from its cement and concrete aggregate divisions.  The company also makes lime needed by gold and alumina miners, and masonry products, which are primarily used in residential and commercial building construction.  Adelaide concrete and aggregates would primarily find their way into walkways and retaining walls surrounding major infrastructure products.  The full range of masonry, concrete and aggregate products could be used in Airport construction as well as port and rail terminals.  

The company reported Full Year 2014 Results on 26 February, with a solid revenue increase of 8.9% and a profit increase of 14.3%.  The share price has been rising since the announcement.  Here is a six month price chart for ABC.  

The final stock in the table is tiny Schaffer Corp Ltd (SFC) whose primary revenue stream comes from automotive leather.  The company began in 1955 as a producer of sand-lime bricks and maintains a building materials division consisting largely of paving products.  Schaffer also has property investments but management has stated its primary focus at this time is the growth of its automotive leather operations.

However, the company has a subsidiary within its Building Materials division that could prove to be a major winner in future infrastructure projects.  Delta Corporation manufactures precast concrete systems that offer dramatic improvements over onsite construction.  Delta precast concrete has already been used in a variety of civil construction projects from bridge and tunnel construction to rail systems.  

These systems come “prestressed” up to 2500 tonnes and are suitable for high capacity construction.  This may be a stock to watch, but it won’t be easy.  There appears to be no analyst coverage; no market expert commentary; little financial news; and management focused on other operations of the company.  

Investing in infrastructure building material stocks or in civil engineering or construction companies is not for those with little patience and short attention spans.  This is the long game to the nth degree.  

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