Adelaide Brighton mulls merger after fall in interim profit

Weak trading conditions may spur Adelaide Brighton to consider merging with the Barro family’s building products firm.

A Adelaide Brighton carrier unloads limestone at the Birkenhead wharves in Adelaide.

Cement producer Adelaide Brighton has opened the door to considering a potential merger with the building products group owned by Melbourne’s billionaire Barro family, as weak trading conditions boost the case for the two suppliers to combine.

Barro Group holds a 43 per cent stake in Adelaide Brighton and its figurehead Raymond Barro assumed the chairman’s role in May, while his older sister Rhonda Barro also sits on the cement company’s board.

Amid expectations the downturn in the residential construction market will persist until 2021, Adelaide Brighton chief executive Nick Miller said it needs to consider all options as a business.

“I think in softer markets it’s always essential that we look at consolidation opportunities to leverage synergies and leverage efficiencies in assets,” Mr Miller told The Australian. “The Barro business is one of those opportunities that we’ll consider in the same vein as we consider other acquisitions for Adelaide Brighton.”

The Barro family has been steadily lifting its control over the $2 billion manufacturer via creep provisions, with its 43 per cent stake raising talk the Barro Group could either launch a takeover of Adelaide Brighton or Barro itself could be swallowed.

Speculation was further stoked after Mr Barro said there is “merit” in a merger to create a cement giant after Adelaide Brighton’s annual general meeting in May.

Mr Miller said any deal would need to fit the company’s specific criteria.

“Just like all acquisitions we look at that criteria: does it fit with strategy, does it create some scale efficiencies, does it leverage returns to shareholders more effectively.”

Asked if any talks between the two companies were active, Mr Miller said: “There is nothing live at present.”

Certainly bulking up at a time of tough market conditions may hold some merit after Adelaide Brighton blamed both competitive pressures and tough conditions in construction markets for a 35 per cent fall in interim net profit.

Cement volumes fell nearly 9 per cent in the half due to declines in east coast construction activity while concrete volumes slumped 8 per cent, with NSW and Victoria hardest hit.

The residential construction market will remain subdued for at least another 18 months before returning to growth, according to Adelaide Brighton, noting Australian residential construction approvals declined more than 25 per cent on seasonally adjusted terms for the six months to June 2019.

While interest rate cuts and government moves to stimulate the economy were a welcome step, fewer home buyers are accessing loans and those who do are facing a longer wait to get approved.

“If I talk to various banking institutions, they’re still writing 25 per cent less loans and the application process is taking them in the order of 25 per cent longer to process,” Mr Miller said. “That’s important particularly for first homeowners that want to turn up to an auction and buy a property and have the confidence they’ve got security of funding on the day.”

Much like competitor Boral, delays in a nationwide infrastructure boom have frustrated material suppliers in the sector.

The cement boss remains confident he can tap into specific targets but questions whether the entire $300 billion pipeline will flow through as anticipated, partly due to constraints in the construction and material supply sectors.

“My view is the duration of the infrastructure spend will be longer and the peak will not get as high as demonstrated in the economic data,” Mr Miller said. “It’s about the multitude of approvals, of engineering challenges and delays to infrastructure projects coming on track.”

Adelaide Brighton will target the Western Sydney airport and associated roads infrastructure, defence deals in Northern Territory and South Australia, Queensland’s Bruce Highway upgrade and wind farms in rural Victoria.

Earlier the company said first half net profit on an underlying basis fell to $55.3m, in line with consensus, and compared with $85.2m for the same period a year ago while revenues fell 6.3 per cent to $755m. A 31 per cent fall in earnings before interest and tax of $85.2m was 4 per cent above a Credit Suisse estimate.

It reported a $96.1m impairment following a review of the business, which tipped the company into a reported net loss after tax of $17.9m.

The interim dividend was axed as previously guided to the market last month and a $30m cost cutting drive has been set, reducing to a net saving of $10m taking into account $20m of cost headwinds.

Adelaide Brighton retained its forecast for underlying net profit after tax for the year through December to be within the range of $120m and $130m from last year’s $190m result.

The downgraded annual guidance, representing a 26 per cent fall from a May forecast, was delivered to the market on July 31.

Adelaide Brighton shares fell 0.32 per cent to $3.12.