Adelaide Brighton Reaping Broker Upgrades

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– Adelaide Brighton interim report meets expectations
– Earnings guidance seen as conservative
– Ratings upgraded post the result

By Chris Shaw

The market had been expecting interim earnings from Adelaide Brighton ((ABC)) of around $62 million and this was the result delivered by management. Accompanying the result was guidance for full year earnings of $144-$152 million, which implies a stronger second half of 2011.

The full year guidance provided by management leads Goldman Sachs to suggest 1H11 is likely to be the low point for earnings in the current cycle. This reflects the view significant infrastructure and mining projects expected in the key South Australian and Western Australian markets should lift earnings in the core construction materials business.

As well, Goldman Sachs notes Adelaide Brighton's lime operations should benefit from price increases of around 25% contracted with a key customer, as well as some volume gains thanks to the Worsley project expansion and the Ravensthorpe project.

Earnings should also improve via some internal growth projects according to Goldman Sachs, one example being the clinker grinding plant expansion at Birkenhead. As BA Merrill Lynch notes, around $95 million has been committed to capex plans over the next two years to expand the cement and lime operations.

Acquisitions should also be a driver of growth, BA-ML noting so far in FY11 Adelaide Brighton has spent around $47 million on bolt-on purchases. This helped push up net debt by 22% to $221 million, but Citi points out net gearing remains relatively comfortable at around 24%.

Factoring in the money being spent on capex and acquisitions, Citi takes the view full year earnings guidance offered by management may prove to be conservative. Price rises will be a key, as Citi notes cement and lime volumes are likely to be flat and the concrete masonry business should remain weak.

On the back of both the interim result and the guidance offered by management brokers have made only modest changes to estimates. Goldman Sachs has lifted its earnings per share (EPS) forecasts by just over 1% for both FY11 and FY12, while BA-ML has gone the other way and trimmed forecasts slightly.

Consensus EPS estimates according to the FNArena database now stand at 23.5c for FY11 and 25.7c for FY12. Goldman Sachs is not in the database but is forecasting EPS of 23.1c and 27.2c respectively.

Ratings have been upgraded post the result, with both Citi and Credit Suisse in the FNArena database and Goldman Sachs lifting ratings to Buy from Hold previously. This means Adelaide Brighton now scores Buy ratings from all eight brokers in the database, plus Goldman Sachs on top.

For Goldman Sachs the upgrade reflects the fact a key customer has extended a contract with Adelaide Brighton, which pushes out the timetable for potential market share losses in the WA and SA markets. This makes the current discount to valuation attractive, so warranting an upgrade.

Citi's upgrade to a Buy reflects both recent share price movements and relatively strong performance from Adelaide Brighton's key underlying businesses. As well, Citi, along with JP Morgan, suggests full year earnings guidance offered by management as likely to prove conservative. 

Credit Suisse also sees value, noting at current levels Adelaide Brighton is trading on a 12-month forward earnings multiple of 10.7 times and a fully franked dividend yield of 6.9%. This is enough to make the stock Credit Suisse's preferred exposure in the building materials sector.

A further attraction noted by JP Morgan is Adelaide Brighton has a significant level of excess franking credits on its balance sheet and a conservative capital structure. This offers scope for the introduction of some capital management initiatives.

Given only minor changes to forecasts the consensus price target for Adelaide Brighton according to the FNArena database is little changed post the interim result at $3.36. This compares to a prior target of $3.38.

Shares in Adelaide Brighton today are weaker and as at 11.20am the stock was down 2c at $2.64. However, the market in general is down by 2.5% after another horror session on Wall Street and in European markets. Today's share price compares to a trading range over the past 12 months of $2.22 to $3.72. At current levels the share price implies upside of around 27% to the consensus price target in the FNArena database.

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