Under pressure from a multitude of factors, the Australian heavy construction industry has buckled on appropriate price increases to mitigate the cost increases. ADBRI’s favourable cost position was no defence and its interim earnings have capitulated.
ABC’s 1H22 EBIT of $79.8 million was 16.4% below consensus leading to a net profit of $54.3 million, 12% below consensus forecasts. The interim dividend was a casualty, falling to 5cps from 5.5cps in 1H21.
The earnings miss was mostly attributable to lower margins in CLCA (Cement, Lime, Concrete and Aggregates) which fell to 10.6% from 16.2% last year. Volume was not the issue as ABC saw growth in cementitious materials (11%), concrete (6%) and aggregates (16%). That leaves price/cost and mix as the trouble-maker. Lime volumes were down 20% due to the reduction in the Alcoa supply arrangement.
Concrete Products barely troubled the scorer with EBIT of $2.2 million. Volumes were impacted by wet weather and the average selling price increased by 4.2% but not enough to offset the cost pressures.
ABC theoretically has a cost advantage over its domestic cement competitors. The energy source for Birkenhead is largely fixed with about 40% of its energy requirements from refuse derived fuel (RDF). Another 35% is covered by a fixed price gas contract with Senex Energy until 2030. The remaining ~25% is exposed to spot prices but break out the violins for Boral with its 85% spot exposure to coal prices.
As cost pressures mount, the ability for ABC to recover energy cost inputs should exceed its rivals. However, this presumes the industry behaves rationally on pricing. This aspect has been conspicuous by its absence leaving ABC unable to capitalise on its cost advantage. In addition, SA Premier has scaled up in South Australia and is a credible threat to ABC in its home market. This will become a real issue in mid to late CY23 with the competitor going ahead with it cement import terminal.
Investment view
Price increases were manifestly insufficient to recover rising costs causing ABC’s margins to implode. Bad weather, surging electricity prices and underperformance of the JV all contributed to the tempest.
ABC’s guidance is for earnings to return to growth in 2H22f, but this will rely on the industry playing ball and raising prices – something it has not demonstrated in 1H22.
Risks to investment view
The heavy construction industry is highly competitive and is exposed to a wide range of input costs. If demand for construction materials falls and/or input costs rise, earnings may fall. ABC’s earnings could recover in 2H22f if the industry collectively lifts prices enough to offset cost rises.
Recommendation
We grudgingly retain our Hold recommendation.
Figure 1: 1H22 RESULT
