Nasty weather, cost pressures and ADBRI’s failure to hike prices sufficiently to offset these factors have cost the CEO his job. ABC’s full year profit has taken a hit and the interim CEO faces a big challenge to maintain margins.
Profit warning. Despite a robust demand environment, according to ABC, extreme rainfall and inflationary headwinds, particularly diesel and energy, have continued to impact margins. The company now expects FY22 underlying net profit (excluding property and significant items) to be between $75-85 million.
Wrong strategy. Pursuing market share gains was arguably the wrong strategy which lead to Nick Miller’s departure as CEO. This has never been a winning strategy in the heavy construction industry. Indeed, ABC lost cement supply contracts to Gunlake in NSW, the Hallett Group in SA and Southern Cross Cement in Qld.
The ABC Board has instructed interim CEO Mark Irwin to improve margins and offset cost pressures while accelerating cost reduction initiatives.
The price realisation instigated by ABC has been lacklustre. At the interim result, Mr Miller suggested ABC would realise 75% of the announced increases, but updated guidance suggested only 50-60% had been achieved. Management has indicated price realisation has been hardest to achieve in NSW, SA and VIC where cement independents are growing (NSW and SA) and independents are prevalent (VIC).
The independents have committed capital to build import terminals and will fight on price to achieve market share. The incumbents need to find a balance between market position and achieving much needed price increases.
Property sales may offset the debt load. ABC may transact some property sales in FY22 to offset the debt load. This may be necessary to ease the pressure on a now stretched leverage ratio although the company remains well within its covenants.
Investment View
The big test for ABC is to achieve price increases that can offset the persistent cost pressures. This will not be easy in the face of increasing competition from the independents. The share price is now trading below NTA but until the earnings outlook shows evidence of improvement, there is no catalyst to buy the stock.
The task ahead of the new CEO is difficult and it may not be enough to resuscitate earnings growth.
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 have retained our Hold recommendation.
