ABC 0.91% $3.26 adelaide brighton limited

Adelaide Brighton

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    32% 12mth target by Sanfords on 29/08/02

    Adelaide Brighton (ABC.AX) Buy
    Building Materials Australia

    [email protected]/08/2002: A$0.95

    12 month range: A$0.97 - 0.58

    Valuation: A$1.25

    Price Target: A$1.25 (+32%)

    Market Cap: A$450.0m/US$248.9m

    Shares on Issue: 473.7m

    Average Volume (000's): 596


    Source: Sanford

    Source: Company Data and Sanford Estimates

    Interim result review.


    ABC today reported an interm profit of $23.6m, some $4m ahead of our expectations and 56% up on pcp.


    An interim dividend of 2.5cps (20% franked) was declared.


    We have increased our 2002 earnings forecast by 11% and our 2003 and 2004 forecasts by nearly 8%. We retain a BUY rating.
    Event


    ABC has reported a much improved interim result, with EBIT up by 58% and NPAT by 56% despite the tax rate moving from nothing to 24%.

    Impact


    The result was the group’s best since 1990, and indicates substantial progress in improving the business.


    We have increased our forecasts for the next three years by an average of nearly 10% while allowing for a return to full tax provisioning status in 2003.

    Valuation/Risks


    We value ABC at $1.25 per share on per ton of capacity basis (US$135/t). We have increased our price target from $1.00 to equal our valuation now that there is empirical evidence that adequate returns can be generated.


    In our view the primary risk to earnings remains domestic construction spending and cement prices. At present the outlook for both appears to us to be robust.


    (A$m, except per share)
    FY01A FY02A % Chg FY02E

    Operating Revenue 203.2 232.1 14% 198.0

    EBITDA 41.4 57.2 38% 52.0

    Deprec & Amort -17.3 -19.1 10% -25.3

    Investment income 0.0 0.0 0.0

    EBIT 24.1 38.1 58% 26.7

    Net Interest Expense -9.0 -7.2 -20% -7.2

    EBT 15.1 30.9 105% 19.5

    Tax Expense 0.0 -7.3
    #DIV/0! 0.0

    Net Profit 15.1 23.6 56% 19.5


    Reported EPS (cents) 3.2 4.9
    DIV/0! 3.6

    Final DPS (cents) 2.0 2.5
    #DIV/0! 2.0

    Dividend Franking (%) 33% 20%

    Normalised EPS (cents) 3.5 5.1
    #DIV/0! 4.4

    Source: Company accounts, Sanford estimates

    In our view the primary driving force behind today’s result was increased industry demand combined with a strong focus on costs.

    Industry volumes rose by 14% during the half and ABC reported a 16% increase in sales as a result. Unit prices changed little during the period, with the recent price increases being implemented during the June half. On average we expect that $7/t of those increases will hold, impacting the coming half year.

    Depreciation and amortisation (excluding goodwill) increased by 17% to $22.2m. Goodwill amortisation was essentially unchanged at $4.2m.

    EBIT from operations increased by 55% to $33.9m. Margins were 14.6%, nearly 400bps higher than pcp. Income from associates nearly doubled to $4.2m as earnings from Sunstate increased by 130%, in no small part due to lower clinker costs.

    In total group EBIT increased by 58% to $38m with negligible pricing benefits.

    Interest costs fell by 20% to $7.2m as lower debt levels and lower rates following redemption of the 11% convertibles impacted. Interest was 5.3x covered by EBIT, the highest level since 1991.

    The tax rate was 24% (27% when adjusted for associates) compared with nothing in the previous period.

    The balance sheet is in much better shape. The April rights issue essentially covered the cost of the Premier acquisition, while capex was $10.6m below depreciation and amortisation and operating cashflows increased by $4.8m to $40.4m allowing for nearly $55m in debt retirement. Gearing is now 37%, a level which we expect to continue to decline.

    The outlook here remains in our view quite sound. We see cement volumes as likely to be static, however lime volumes could rise by nearly 10% over the next 18 months. Cement prices ought to be somewhat higher in the second half and we expect further increases later this year.

    At present all domestic producers bar QCL are importing clinker to cover capacity shortfalls. While there are a number of potential debottlenecking projects possible over the coming year (an 80-100kt increase in grinding capacity at Waurn Ponds, a 100kt increase in clinker capacity at Birkenhead and a similar increase in grinding capacity at Port Kembla) the only project likely to add appreciably to industry capacity that we envisage is a 400kt expansion of Berrima #6. This would, we suspect, take two years or so to approve and implement and would presumably result in the 450kt #5 kiln (presently used as a swing producer) being mothballed.

    On balance we believe that the supply/demand dynamics for domestic cement are better than they have been for 15 years, going back to the major expansions of Birkenhead and Railton which were undertaken in the late 1980’s. ABC ought to be the primary beneficiary of this as the sole pure domestic producer.


    Charts support IMO



    Todays vol alert
    Weekly



    daily



    RH shoulder has built solid base

 
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Buyers (Bids)

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7 68619 $3.25
 

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Price($) Vol. No.
$3.27 56442 5
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