Delays, Weather Shadow Adelaide Brighton

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Delays in infrastructure activity and an uncertain housing outlook have cast a shadow over Adelaide Brighton, which has downgraded earnings estimates for 2018.

-Downgrade implies a sharp reduction in second half earnings
-Brokers find it hard to be positive without a formal strategy being announced
-Housing outlook the key to 2019 expectations
 

By Eva Brocklehurst

Delays in projects and a slow recovery from weather-related events on the east coast have produced some difficulties for Adelaide Brighton ((ABC)) as it finishes 2018. The company has downgraded 2018 net profit estimates to a range of $188-195m, -7% below the guidance provided in August.

Adelaide Brighton cites delays with a major project in South Australia and slower demand from infrastructure activity in that state as being behind the downgrade. Activity in Western Australia is softer than expected, while extreme weather on the east coast has held back a recovery.

Macquarie notes the downgrade represents a sharp reduction in second half earnings, which it lowers by -14%. The delays with a major South Australian infrastructure project are a timing issue and the broker understands the development is on track.

The company has indicated that price momentum is firm and, taking into account contracted energy costs, Macquarie expects margins will be underpinned to some extent. Still, the main challenge lies with the uncertainty over the outlook and strategy, related to a change in management.

The recent sell-off on the stock has meant a reduced premium to peers but Morgan Stanley urges caution, given the pending change in management. The new CEO, Nick Miller, will start on January 30 but the broker agrees it will take some time to enunciate a formal strategy.

Without this, Morgan Stanley finds it hard to be convincingly positive on the stock. The broker adjusts forecasts for the cement, lime and concrete segments amid the slowing of construction activity and the infrastructure delays.

Adelaide Brighton is considered capable of leveraging the strength of the emerging South Australian infrastructure boom, although the downgrade highlights the importance of the regional mix, as SA is lagging the eastern states. This also highlights that the company is at the mercy of others generating the activity, in regard to project timing.

Housing

UBS was always cautious heading into the the end of 2018, given the east coast weather, but still considers the update highlights some weakness elsewhere in the portfolio. The broker believes Australian investors are closely watching housing activity, and estimates that around 30% of the company's revenue is derived from residential, which is split 50/50 for detached/unit dwellings.

Yet, the update provided no indication of the current state of housing activity or the company's expectations in 2019. This is likely to be forthcoming with the full year result. The broker recently initiated on the stock with a Sell rating, noting the macro backdrop is likely to drag on earnings growth and sentiment.

UBS asserts investors have been previously drawn to the stock for its simplicity and yield and, while these qualities are retained, they are not enough to insulate against a decline in housing. UBS considers the slower recovery from adverse weather on the east coast also could be a negative read for Boral ((BLD)).

Ord Minnett estimates the stock's premium over Boral is too large based on 2019 enterprise value/operating earnings multiples. Although, the fully franked dividend yield of around 6% and buying support from Barro may limit potential downside.

There are three Hold ratings and four Sell on FNArena's database. The consensus target is $5.19, suggesting 16.7% upside to the last share price. Targets range from $4.20 (UBS) to $6.60 (Credit Suisse, yet to comment on the downgrade). The dividend yield on 2018 and 2019 forecasts is 6.2% and 6.1% respectively.

Late Mail: Credit Suisse has this morning upgraded ABC to Outperform from Neutral while lowering its target to $5.30 from $6.56, taking the FNArena average down to $5.01.

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