Morningstar | Australian Construction Materials Names Appealing Amid Softened Global Growth Outlook. See Updated Analyst Note from 10 Apr 2019
U.S.-China trade tensions, weakened consumer and business confidence in Europe, and tightening financial conditions in emerging markets led the IMF to downgrade their near-term global growth outlook. Australia is not immune to the slowdown and is now expected to post GDP growth of 2.1% in 2019, down from a prior 2.7%. We’d already anticipated softening volumes in 2019 for both narrow-moat Adelaide Brighton and no-moat Boral’s construction materials businesses. Nonetheless, we’ve trimmed our volume forecasts for 2019 further to account for the downgrade to Australian GDP forecasts. But circa AUD 280 billion in announced public infrastructure projects over the coming four fiscal years will support demand for construction materials through the medium term and drive growth in volumes once more in 2020. We reiterate our fair value estimates for Adelaide Brighton and Boral of AUD 5.00 and AUD 5.80, respectively. Following share price weakness, Adelaide Brighton and Boral trade at 14% and 18% discounts to their respective valuations.Softer 2019 volumes for Adelaide Brighton drive a slight revision to our 2019 earnings estimate. Volumes are now anticipated to fall by 1.3% in 2019, down from our prior forecast of negative 0.3%. Our 2019 EBIT forecast is lowered by 2.7% to AUD 254 million, inclusive of joint venture, or JV, profits. However, the slowdown is merely cyclical and Adelaide Brighton’s valuation remains intact with volume growth returning from 2020 onward. Positive mix shift and price increases will provide further top-line buoyancy and we expect a largely unchanged five-year sales CAGR of 5.9%.
Similarly, revised near-term volumes at Boral leads us to trim our full-year fiscal 2019 EBITDA forecast by 2.5% to AUD 1,060 million, including Boral USG JV profits. But valuation is not impacted with medium-term growth in Australian construction material and U.S. fly ash volumes supporting the top line. We expect a five-year sales CAGR of 3.3%, largely unchanged.
Adelaide Brighton is an integrated construction materials and industrial lime producer which supplies a range of products into building, construction, infrastructure and mineral processing markets throughout Australia. Co.'s principal activities include the production, importation, distribution and marketing of clinker, cement, industrial lime, premixed concrete, construction aggregates and concrete products. In addition to domestic production, Co. is the importer of cement, clinker and slag into Australia.
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