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Treasure Chest: Wagners Expansion Resonates

Treasure Chest | Sep 16 2019

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. The expansion strategy of concrete producer Wagners is resonating with several brokers.

-Opportunity ahead as consumption of new generation building materials increases
-Value uncovered after stock de-rating but near-term challenging
-Upside envisaged over the medium term, given the cyclical low point in the construction cycle

 

By Eva Brocklehurst

Wagners Holding Co ((WGN)) is rolling out its concrete plants with greater diligence, in tandem with a return of the Boral cement volumes in the first half of FY20. Yet competitive cement import capacity is being introduced into the company's markets and a lack of major infrastructure demand is likely to weigh over the next few months.

Segment margins are forecast to be down -12% over the next year, affected by lower volumes. There is a shift in mix towards lower-margin transport for concrete consumption and a competitive pricing environment in south-east Queensland where the company does most of its business.

That said, the company's commentary around the speed and urgency of the roll-out of concrete plants provides Wilsons with confidence that internal targets will be achieved. Wagners has outlined an additional contribution of $2.1m to operating earnings (EBITDA) in FY20, as a result of increased sales, rising to $4.2m in FY21.

Wilsons upgrades forecasts materially for FY21 and, as a result, increases its valuation, although acknowledges conditions will stay challenging for a while. Credit Suisse also believes there is opportunity ahead of the company, forecasting consumption of new generation building materials will be up 25% in FY20, as Wagners continues to grow its composite fibre technology, particularly in international markets.

Wilsons, not one of the seven stockbrokers monitored daily on the FNArena database, upgrades the stock to Buy, with a target of $2.86, encouraged by the recent internal developments. The broker's forecasts now include more product from the rolling out of concrete plants and a likely win at the Mozambique LNG contract.

Concrete is still expected to be loss-making in the long-term, irrespective of the improvements in capacity, but the larger footprint will pull through higher-margin cement and aggregate volumes and provide some offset to the loss of the Neilsens contract in FY20, in the broker's view.

Wilsons estimates the pipeline of work in Queensland that has received funding totals $3.6bn. This still largely represents projects that were various stages of seeking fund in December 2018. Moreover, the broker points out, this does not improve the near-term outlook for the sector in south-east Queensland, as non-residential expenditure in the area continues to underperform on a national basis.

Morgans acknowledges the recent de-rating of the stock, amid weakness in east coast construction activity, has uncovered value, but remains cautious ahead of the upcoming court decision on the dispute with Boral ((BLD)).

The Boral court hearing is scheduled for September 16-17. Cement supply to Boral is expected resume regardless of the court outcome, and at a price likely to be lower than the price before the supply disruption. There is little risk of volumes not returning, given the supply agreement was recently extended to December 7 2031.

Macquarie has only factored in the potential suspension of Boral volumes for the six-month period to the end of September, with no carry-forward of the price impact. An unfavourable outcome for Wagners could influence the price it receives, nevertheless. According to the company, Boral has an obligation to recommence cement offtake and meet contractual obligations until 2031.

Concrete Expansion

In an effort to retain and build out market share, Wagners is taking an aggressive stance and widening its footprint. While not a new entrant in the Queensland market, the company is intent on expanding its share. Nine concrete plants will be in operation by the second half of FY20 versus four plants previously.

To be most effective, concrete supplies need to be accessible to customers in a wide geography, Wilsons notes, estimating an average utilisation rate of 50% for the nine plants at end FY20. Boral has 67 concrete plants in Queensland.

To help lower the impact of investment, the company has switched its operating model to selling and leasing back concrete plants and has stated it is comfortable with its debt balance in the near term.

Wagners has also elected to suspend its pre-cast operation, expecting to re-start once large projects commence. If successful in winning work for Queensland's Cross River Rail project in FY20, the company does not expect the earnings to materialise until FY21.

Mozambique

Wagners has been involved with early stage works at the Mozambique LNG project and has had a team on site. A final investment decision was announced on June 19 and the company has met with the contractor in Milan in order to prepare for initial stages. Wagners anticipates revenue of $200m and operating earnings (EBITDA) of around $70m from the project over the three-year life of the contract.

FNArena's database has a foot in all three ratings, one Buy (Credit Suisse), one Hold (Morgans) and one Sell (Macquarie). The consensus target is $1.74, suggesting -7.3% downside to the last share price. Targets range from $1.20 (Macquarie) to $2.40 (Credit Suisse).

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