Company Overview: Adbri Limited (ASX: ABC) is engaged in the manufacturing of cement, lime, concrete, and aggregates and concrete masonry products. The company reports its performance in two segments, namely the cement, lime, aggregates, concrete, and aggregates and concrete products. During FY19, cement demand remained stable, supported by increased demand from the resources sector. The business continues to invest in product innovation and new market opportunities that will add value to the Concrete Products division.

ABC Details

Decent Increase in Cash Flow from Operations and Healthy Balance Sheet: Adbri Limited (ASX: ABC) is engaged in the manufacturing of cement, lime, concrete, and aggregates and concrete masonry products. As on 14 September 2020, the market capitalization of the company stood at ~$1.79 billion. The company retains a healthy balance sheet with available cash balance of over $480 million and a leverage ratio of 1.5x and net debt to the total capital ratio of 25.7%. Despite the uncertainty surrounding the markets with the outbreak of the COVID-19 pandemic, all sites of ABC were operational. The company seems well placed to benefit from the demand for construction materials driven by stimulus measures by the Government and the growing demand for cement and lime from the mining sector.

During 1H20, ABC reported a decline of 7% y-o-y in revenue to $700.7 million, impacted by lower demand in New South Wales and Queensland due to the impact of bushfires, flood, and smoke, coupled with lower residential demand. During the 1H20, the cost-out program has offset cost headwinds and seems on track to deliver gross savings of $30 million. Consequently, the company reported an underlying EBIT of $75.2 million (down from $85.2 million last year), which excludes the pre-tax impairment and other restructuring and transaction costs. The decline in EBIT was mainly due to the lower concrete volumes in the higher-margin New South Wales market and lower cement volumes in the South Australian market. During the half-year, the company reported NPAT of $29.1 million and witnessed a robust growth in cash flow from operations to $116.3 million.

The decent financial and operational performance enabled the Board to declare a fully franked interim dividend of 4.75 cents per share, reflecting a payout ratio of 65% on underlying earnings, in line with the target range of 65-75%. Notwithstanding the impact on demand due to the natural disasters and weaker domestic housing, sales volume of ABC reflected a strong momentum and some parts of operations had outperformed the prior period. During the half-year, the demand for mining was continuous, which resulted in higher volumes as compared to 1H19, while the construction materials sector is likely to benefit from various Government stimuli.

1H20 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Adbri Limited. Barro Properties Pty. Ltd. is the largest shareholder in the company, with a percentage holding of 33.01%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Margins: During 1H20, gross margin of the company stood at 15.1% as compared to the industry median of 35.7%, and a net margin of the company was 4.1% versus the industry median of 9.8%. In the same time span, EBITDA margin of the company stood at 15.5%, reflecting a slight improvement over the previous year margin of 15.1% and Return on Equity of the company was 2.4%. During 1H20, current ratio of the company stood at 4.27x, higher than the industry median of 1.42x. This indicates that the company retains a decent liquidity position and can pay off its current liabilities using its current assets. In the same time span, Assets-Equity ratio of the company was 2.11x, and Debt-Equity Ratio of the company stood at 0.83x.

Key Margins (Source: Refinitiv, Thomson Reuters)

Adbri Secures Contract Extension with BHP: The company has recently announced an extension of four years with respect to the supply of cement and lime to BHP’s Olympic Dam mine in South Australia. The extension marks ABC’s 20-year supply relationship with BHP through to mid-2026 and is in line with the existing terms and conditions. The company will generate a combined revenue of worth ~$160 million over a period of six years.  As per the CEO Nick Miller,” the contract extension demonstrates the strength of the company’s integrated cement and lime position and its high quality and cost-competitive product offering.”

Operational Highlights: Demand for the company’s products is driven by the mining and construction sectors. During the half-year, the mining activity remained uninterrupted, resulting in higher cement and lime volumes in Western Australia. The Victorian demand were strong across all product lines. However, the demand in the South Australian region was impacted by lower residential activities.

During the half-year, the sales volumes for cement and Clinker went down by 6% due to the underlying market softness. However, the demand from mining projects backed cement sales in Western Australia, resulting in an increase of 7% in volumes over the prior comparative period, while commercial projects supported stable volumes in Victoria.  Besides, the volumes for lime sales increased by 4% y-o-y, mainly due to increased demand from the Western Australian gold and nickel markets. Despite lower demand for concrete and aggregates in South Australia, strong external demand for aggregates delivered a higher than anticipated earnings contribution.

Operating Conditions (Source: Company Reports)

Key Risks: The company is exposed to a variety of risks including the risks related to climate change, natural environment and community, the impact of the company’s activities on the communities, changes in technology, higher waste including the excess concrete packaging, use of recycled materials.

Future Expectations and Outlook: The company retains a robust business model and a diverse portfolio of assets. Despite the recent softness in the market conditions, the company seems well-placed due to its geographical spread of operations and products. ABC has increased exposure to the infrastructure and is actively managing its land holdings. It is focused on operational improvement and cost reduction. The company plans to leverage its strategic position, being the largest importer of cement and the second-largest producer of Clinker.

ABC is on track to deliver $30 million in cost-out measures. The Lime business of the company has a unique position accessing low-cost mineral resources secured through the State Agreement Act and long-term statutory approvals. It retains a healthy balance sheet and cash flows which may provide flexibility to benefit from the opportunities through a period of uncertainty. The company has provided guidance for FY20 and expects capital expenditure to be ~$130 million. ABC is prudently managing its capital spend and continue to retain costs and right-size the business to improve performance.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The construction sector is likely to benefit from the stimulus and the combination with a low-interest-rate environment, will help support ongoing demand for construction materials. The growth in population and expansion of the mining sector will continue to drive long-term demand for Adbri’s products. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target upside of lower double-digit (in percentage terms). As per ASX, the stock of ABC is trading on the average 52-weeks’ level of $1.740 - $3.940 and retains the potential for further growth as depicted by the EV/Sales multiple based relative valuation. On a technical analysis front, the stock of ABC has a support level of ~$2.175 and a resistance level of ~$3.557. Considering the current trading levels, decent operational performance, modest long term outlook and extension of the contract with BHP, we recommend a ‘Buy’ rating on the stock at the current market price of ~$2.79, up by 1.455% on 14 September 2020.

ABC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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