Small Caps | Feb 01 2023
This story features JAMES HARDIE INDUSTRIES PLC, and other companies. For more info SHARE ANALYSIS: JHX
By Tim Boreham, Editor, The New Criterion
The varied performance of the ASX building materials sector shows that a rising – or falling – tide does not necessarily move all boats.
At face value, conditions look crook for the providers of quotidian but essential materials such as bricks, concrete, panels, taps and toilets.
Thanks to the Reserve Bank’s ongoing stiff monetary medicine, the housing sector looks more vulnerable than it has in years, while the suppliers are suffering from elevated labour and input costs (notably for gas).
As usual, it’s worth looking closely at what sectors a particular company is exposed to, rather than following the (admittedly gloomy) macro theme of a pending recession and fully-fledged housing meltdown.
Outside of housing, broader construction conditions look far more positive – if only because of the slew of government-funded ‘big build’ projects.
The listed sector is dominated by the likes of the $13bn, Irish-domiciled James Hardie Industries ((JHX)), the $3.5bn Brickworks ((BKW)), cement maker Adbri ((ABC)), CSR ((CSR)) and the Kerry Stokes controlled Boral ((BLD)).
Performance has varied, but broadly speaking the sector has done a Coles and is ‘down down’. The US centric James Hardie has lost one-third of its value over the last year, while Adbri and Boral are down 37% and 40% respectively. However, shares in CSR – which also has interests in property and aluminium – are only 5% off the pace.
Then there’s a cluster of much smaller, little known stocks that have done consistently well by focusing on specific – albeit obscure – sectors.
Take the Sydney-based Acrow Formwork and Construction Services ((ACF)), which was previously owned by Boral and private equity before reverse listing in April 2018.
With a history dating back 80 years, Acrow provides both formwork – temporary moulds into which concrete or other material is poured – and industrial services such as equipment and skilled labour for commissioning projects. It also provides scaffolding and panels and recently entered the market for jump forms (used to construct lift shafts).
Crucially, Acrow has shifted its focus from the residential sector to engineered formwork for mega infrastructure projects. Past jobs include the redevelopment of the Melbourne Cricket Ground, Brisbane’s Airport Link and the Kogan Creek Power Station.
Acrow is currently involved with the Sydney Gateway project, the M12 Motorway, the Metro West train project and – in Queensland – the Bruce Highway upgrade and the Inland Rail and Cross River Rail projects.
Acrow is also involved in the Snowy Hydro 2 venture and has corrected media reports that it has an exposure to the project’s troubled partner, Clough Engineering.
As broker Ord Minnett notes, Acrow managed to update guidance on ten separate occasions, including during the pandemic.
The momentum continues.
At Acrow’s November AGM, management proffered guidance of revenue of $165-175m for the year to June 2023 – 15% higher at the midpoint – with a net profit of $23-24m (about 32% better).
This month’s half-year numbers should validate this optimism.
In a similar-yet-different vein, the NSW-based Big River Industries ((BRI)) provides triple veneer plywood and formply and also distributes building supplies. With a network of building trade centres, Big River also provides much-needed competition to Bunnings Trade.
Big River boosted its revenue by 45% to $409m in the FY22 year, with earnings before interest tax depreciation and amortisation (ebitda) more than doubling to $48m.
On unaudited numbers, September quarter revenue gained 33% to $123m, with underlying earnings climbing 62% to $15.4m.
Ord Minnett forecasts full year revenue of $448m, up 10% and a net profit of $23.2% (two per cent higher).
In contrast to their weightier peers, Acrow and Big River shares have gained 60% and 18% respectively over the last 12 months. The shares are valued at around $180m and $200m respectively.
Despite this, both stocks trade at a 40% discount to their peers and are on a miserly price-earnings multiple of seven to eight times. This compares to the sector average of around 14 times earnings.
“We are confident about Acrow’s and Big River’s ability to sustain recent market share momentum and believe both have a significant runway of growth,” Ord Minnett says.
Meanwhile another construction minnow worthy of the watch list is the Toowoomba-based Wagners ((WGN)) which supplies materials such as cement, concrete and aggregates, as well as precast concrete and reinforced steel.
Wagners also has a patented green-friendly product called Earth Friendly Concrete, which results in 70% less embodied CO2 than conventional concrete making. Wagers also provides specialist engineering and maintenance services.
Once again, Wagners is exposed to the reliable civil construction sector rather than housing, but its share price hardly reflects this advantage: since listing in 2017 at $2.17 the stock has lost 70% of its value.
At last October AGM, chairman Denis Wagner admitted that while the revenue of $338m for the FY22 year was OK, earnings had not grown to the degree that “some people expected” (net earnings came in at $7.6m, -24% lower).
He called out “unfortunate industry behaviour” in the Queensland concrete market, a reference to unsustainable discounting which appears to be abating.
Despite a list of woes including bad weather and labour shortages, management still expects the company to post full-year earnings before interest and tax (ebit) similar to last year’s $21.4m.
If a few things go right, the $150m market cap Wagners finally might regain its verve. The Wagner family has an iron grip on the register, so it’s got a keen interest in getting it right.
One potential catalyst is a deal to provide 67,000 precast concrete segments for the delayed Sydney Metro train project – a deal worth $140m over two years.
A common trait of Acrow, Big River and Wagners is their focus on Queensland – a promising place to be in the lead up to the 2032 Brisbane Olympic Games.
More broadly, value seems to be emerging across the sector, but the resounding message is that housing is not as safe as houses, even if the Reserve Bank tapers back its rate increases as expected.
This article does not constitute share recommendations and readers should seek their own financial advice from a property qualified party
Content included in this article is not by association the view of FNArena (see our disclaimer).
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