Big Movers – 6 building material stocks to watch

Sometimes doomsday prophecies never seem to eventuate.  Such appears to be the case with the dire Australian Housing Bubble, whose impending burst would flood us all.  For months now experts have signaled a recovery in the property sector.  Housing starts figures recently released by the ABS (Australian Bureau of Statistics) are the latest evidence to support that view.

Economic forecasters can be wrong, and sometimes they can be very wrong.  Economists surveyed by Bloomberg expected a rise of 0.5% in building approvals for January of 2014.  The reported figure showed a 6.8% increase, from a seasonally adjusted figure of 16,141 in December to January’s 17,514.  Year over year the expectation was for a 24% in approvals from January of 2013, well short of the actual 34.6% increase.

ASX stocks to benefit include the builders and property developers as well as the suppliers of construction and finishing supplies.  Common sense suggests the safest play here is the building materials sector.  Property developers’ revenues are subject to construction delays as are the profits of home furnishings needed to make buildings ready for sale.  The suppliers of brick, mortar, and other materials that go into the actual building construction would seem to be less susceptible to delays in revenue bookings.  Here then are six of Australia’s top suppliers of building materials, along with a diversified niche player:

James Hardie Industries (JHX) claims to be the world’s largest supplier of fibre cement products used in commercial and residential construction.  The buzz about this company over the last year has been its benefit from the lower AUD and the gradual recovery in the US housing sector.  According to a November 2013 Investor Presentation, JHX derives 76% of its revenue from its USA and Europe operations, with 24% coming from the Asia Pacific region, not an insignificant number.  Despite the struggles of the US housing sector and the more recent concerns here in Australia, JHX has rewarded its shareholders over a five year period and its one year performance is even more stellar, with a 60.8% total shareholder return.

Note the company’s outsized two year earnings growth forecast of 95.9% and respectable five year expected P/EG of 1.05.  While Hardie’s 2013 unfranked dividend yield of a meager 1.5% is hardly a reason to like this stock, the future may be different.  In its 03 March release of Q3 results the company surprised analysts and investors alike with the declaration of a special dividend of $0.28 per share.  This prompted an analyst at Macquarie to speculate JHX management may be ready to curtail its share buyback efforts and return more capital to investors.  Macquarie upgraded its recommendation from Neutral to Outperform.  Although hit hard by the post-GFC collapse of the US housing market, Hardie’s share price recovered and is up 120% over ten years.  Here is the performance chart:

New Zealand based Fletcher Building Limited (FBU) in its Half Year 2014 earnings release reported that 40% of its revenue came from Australia, with New Zealand accounting for 47% and the rest of the world 13%.  The company operates in three segments, all of them supplying building materials for commercial and residential construction; as well as a general contracting business.  The building materials segments focus on infrastructure products, such as cement and PVC piping; building products, including plasterboard and insulation; and laminates and panels, including particle board and laminate surface products.  Fletcher also operates a distribution segment, offering building and plumbing supplies to the public as well to the trades.

It is a sad fact of life that tragedies for some spur opportunities for others.  Earthquake recovery in New Zealand is one such example where FBU will benefit from re-construction efforts.  In the short term, the company’s stock price declined in the aftermath of the Christchurch earthquake in February of 2011.  Here is a five year chart for FBU:

Fletcher’s dividend yield is 3.5%, but it is unfranked.  However, the company is arguably the most broadly diversified building materials provider of any stock in the table and has a respectable Forward P/E of 14.34 along with a projected five year P/EG of 1.39.

Boral Limited (BLD) is the only stock in our table to see less than 10% share price appreciation year over year.  The company’s healthy two year earnings forecast of more than 40% and very low five year expected P/EG of 0.66 suggest better times ahead for shareholders.  Boral products fall into three broad categories – building products such as bricks, tile, and flooring; plasterboard products; and heavy construction products like cement and asphalt.  Boral is international in scope with operations in Australasia and the US.  The company reported Half Year 2014 results in mid-February, showing a modest increase of 4% in revenues and a 73% gain in profit after tax, before significant items reduced the $90 million positive to a loss of $26 million.  Although major analysts appear to have been somewhat unimpressed, with no upgrades and three price target increases, investors felt otherwise.  Here is a three month price chart showing reaction to the results:

The share price continues to rise as Boral announced the joint venture with US based USG Corporation had been completed.  USG Boral Building Products is the name of the 50/50 business, first announced to the market in October of 2013, resulting in a 6% increase in the share price at that time.

Immediately prior to the onset of the GFC, cement and related products supplier Adelaide Brighton (ABC) was trading at just under $4.00 per share.  The stock price plunged in the blood bath that followed, recovered, and then stuttered again as concerns about construction slowdowns in Australia in 2011 had their impact.  Adelaide operates only in Australia.  Today, the company’s share price has exceeded its pre-GFC high and is now trading at $4.30 per share.  Here is a ten year performance chart:

On 20 February the company reported Full Year 2013 results, showing record revenue of $1.228 billion, a 3.8% increase.  While net profit after tax (NPAT) was down 1.2%, the number excluding a 2012 accounting adjustment from a 2012 acquisition showed a 3.9% increase.  The share price rose from around $3.90 per share to $4.30 in reaction to the news.  Analysts at Macquarie, BA-Merrill Lynch, JP Morgan, UBS, Deutsche Bank, and Credit Suisse all raised price targets with Credit Suisse commenting “the company is in the best shape it’s been for some time.”  Adelaide’s current dividend yield is 3.8%, fully franked.

Brickworks Limited (BKW) is a building materials supplier with other ventures, including property ownership and an investment operation.  BKW is our largest supplier of bricks and offers other construction products such as tile, flooring, blocks, pavers, and timber products.  The company’s Investment Division should be of interest to any investor looking for protection from market volatility in the building materials business.  Brickworks holds a 43% interest in Washington H. Soul Pattinson and Co. Ltd (SOL), a broadly diversified group with holdings from coal and copper to ASX share ownership to pharmaceutical products.  SOL has its hand in building materials as well – through its 48% stake in Brickworks!  This somewhat odd arrangement of the two companies heavily invested in each other makes a takeover of either somewhat unlikely.  Macquarie and Deutsche Bank have Outperform and Buy recommendations on Brickworks.

On 31 January Brickworks announced the $25.93 million dollar sale of one of its properties, Rochedale North in Queensland.  Much to the delight of shareholders, the stock price rose in response.  Here is a three month price chart for BKW:

Thomson/First Call shows five analysts covering BKW, one at Hold, three at Strong Buy, and one at Buy.  The company reported Full Year 2013 results back in October, with NPAT almost doubling, from $43.3 million to $85.2 million.

CSR Limited (CSR) is a diversified company with four divisions – building products, glass, aluminum, and property.  The first two supply building materials for commercial and residential construction ranging from glass windows to sheet rock, insulation, fibre cement products, and ventilation systems.  The aluminum division has interests in aluminum mines and smelting operations and the property division manages former CSR manufacturing facilities and other land holdings.  CSR operates in Australia and New Zealand.

With commodity prices showing considerable volatility in recent times, one could reasonably expect CSR to be hurt by its exposure to aluminum.  Yet the company shocked the market in its 13 November 2013 release of Half Year results with its 92% increase in NPAT.  What’s more, group results showed a 32% rise in earnings before interest and taxes (EBIT) for the aluminum division.  Management attributed the result to higher ingot prices, “opportunistic hedging,” and cost controls.  Still, analysts at JP Morgan, BA-Merrill Lynch, and UBS all expressed concern about aluminum pricing in the future, with UBS downgrading CSR from Buy to Neutral, largely due to the bump in share price following the release.  Here is a six month chart for CSR showing market reaction:

Hills Ltd (ASX: HIL) is a company reinventing itself, shedding its steel operations and moving to a focus on three segments – home, business, and enterprise and government.  The company’s new vision is impressive, looking to target finance, health and senior care, education, transport and logistics through its electronics and communications solutions.

Hills is moving into networking and communications, and a range of home systems and services targeting a lucrative building materials niche – security, surveillance, and monitoring.

Hills solutions include alarm and video monitoring systems, as well as “smart home” management systems.  CIMB Securities is the only major broking house with a current recommendation on Hills, calling the company a “standout”, with an Add recommendation.  Following Hill’s release of Half Year results, CIMB raised its price target to $2.20.  The results were impressive.  Despite an 8.9% drop in revenue, underlying profit rose 98% – from a Half Year 2013 loss of around $70 million to the current +$16.2 million.  The market liked what it heard.  Here is a one month chart for Hills, whose share price is still up close to 70% year over year:

Management has stated restructuring efforts are complete and the new Hills expects to see full-year profit between $26 and $28 million.

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