Company Overview: Adbri Limited (ASX: ABC) is engaged in the manufacturing of cement, lime, concrete, and aggregates & concrete masonry products. The company reports its performance in two segments: cement, lime, aggregates, concrete, & aggregates, and concrete products.

­­­­­­ABC Details

Material Business Updates

Figure 1: Key Public Announcements by ABC

Source: Company Reports, Analysis by Kalkine Group

Historical Financial Trend:

ABC illustrated substantial impact from COVID-19 disruptions shrinking the top line in FY20; however, current acquisitions and subsequent synergy build-up shall deliver significant top-line support on a Pro-forma basis. The Operating revenues have witnessed turbulence in FY20 and FY19. Operating revenues grew at a 1.1% CAGR (FY16 – FY20).

Figure 2: Historical Financial Overview

Source: Company Reports, Analysis by Kalkine Group

Half-Yearly FY21 Performance:

Figure 3: H1FY21 Performance

Source: Company Reports, Analysis by Kalkine Group

Full-Year FY20 Performance:

Figure 4: FY20 Performance

Source: Company Reports, Analysis by Kalkine Group

Top 10 Shareholders:

The top 10 shareholders together form ~55.48% of the total shareholding. Barro Properties Pty. Ltd. and Barro Group Pty. Ltd. holds a maximum stake in the company at ~­­­32.99% and ~9.04%, respectively.

Figure 5: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Metrics:

Stable pricing strategies across all product ranges have substantially supported top-line, despite declining volume levels, subject to aggregate market demand, especially in NSW and Queensland. Prudent working capital management has delivered sufficient current asset levels and upticks in operating cash flows.

Figure 6: Key Financial Metrics

Source: Analysis by Kalkine Group

Outlook:

Market Demand and Resilience: Demand from the mining sector has stood strong with a favourable outlook for nickel, gold, iron ore, and alumina. ABC showcased high resilience with sales volumes in July and August, meeting company expectations.

Cost-Out Program: ABC’s cost-out program is expected to deliver better cost savings as the company enters low-cost energy contracts, expected to support H2FY21 earnings. The cost programs are aimed to provide ~$100 million in gross cost savings over the next five years.

Commercial Guidance: Capex is expected to increase H2FY21 via spending on the Accolade and Kwinana projects. Total capex is projected to clock ~$200 million. Surplus land sales are expected to generate $20 - $30 million in proceeds over two years.

Key Risks:

Gradual Retrenchment of Government Policies: The government stimulus and HomeBuilder program gradually unwind, affecting construction activities.

COVID-19 Uncertainty: The uncertainties brought about by the COVID-19 variants have made it difficult to focus on volume growth.

Labor Shortage: Labor mobility has become a significant concern across the Australian economy, substantially impacting the mining and construction sectors.

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

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation:

ABC has delivered 3-month and 6-month returns of ~-15.522% and ~-12.112%, respectively. The stock is trading below the average of the 52-week low price of $2.750 and the 52-week high price of $3.870, indicating an accumulation opportunity. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method, and the target price so arrived reflects a rise of low double-digit (in % terms). The company might trade at a slight premium compared to its peers’ median EV/Sales (NTM trading multiple), considering the high emphasis on cost-saving strategies and stable product prices. For valuation, a few peers like Brickworks Ltd (ASX: BKW), CSR Ltd (ASX: CSR), Boral Ltd (ASX: BLD), and others have been considered. Considering the continuous involvement in the company’s cost-saving strategies, synergy prospects from acquisitions, favourable working capital management, and potential upside as indicated by the valuation, we give a “Buy” recommendation on the stock at the current market price of $2.820, as of 21 December 2021, at 11:38 AM (GMT+10), Sydney, Eastern Australia.

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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