Construction market collapse undermines Adelaide Brighton

A dramatic fall in the construction market has sparked a second profit warning for Adelaide Brighton.

Adelaide Brighton shares dived by 18 per cent to $3.54.

A dramatic fall in Australia’s residential and civil construction market has sparked a second profit warning for Adelaide Brighton, with soft conditions forcing the country’s largest cement maker to scrap its interim dividend and take a $100 million writedown.

Adelaide Brighton shares dived by 18 per cent to $3.54, marking its biggest slump since 2004 and sparking a knock-on effect on building materials rivals, with Boral shedding 8 per cent and CSR off 6.3 per cent.

Building approvals fell this week to a six-year low in a worrying sign for the broader economy as high-rise apartment sales stumble over tight lending and quality scandals.

The 26 per cent slump in residential approvals on a year-on-year basis, based on Australian Bureau of Statistics data, has rattled building product providers exposed to the trend, with Adelaide Brighton predicting tough market conditions may prevail for a further 12 to 18 months.

“People predict the bottom of the cycle is 12 to 18 months away and that seems to be a common thread and is probably our view too,” Adelaide Brighton chief executive Nick Miller told The Australian. “As a general rule we are seeing that softness in most locations. The issue is really around the replacement of those volumes as the contracts we’ve got in place run off.”

Adelaide Brighton now expects underlying net profit after tax for the year through December to be in the range of $120 million to $130m.

That marks a 26 per cent fall from a previous forecast on May 9 when it downgraded annual net profit by 15 per cent from last year’s $190m result.

An interim dividend will also be axed to conserve capital and maintain balance sheet flexibility, including potential deal activity.

The company also flagged a non-cash impairment of up to $100m pre-tax for the six months to June 30 this year, which would represent no more than 5 per cent of its total assets.

Adelaide Brighton is due to release its interim results on August 28.

The revised guidance issued yesterday was due to a further softening of conditions in the residential and civil construction markets, combined with continued competitive pressure in Queensland and South Australia.

Interest rate cuts might spur investment but the company said accessing capital remained an issue for home owners and improved borrowing limits from the banking regulator had yet to flow through to the market.

“We’re aware that accessing capital is taking longer and getting through the gate to get approvals is also harder,” Mr Miller said.

“So we have these two conflicting issues at the moment with interest rates coming down but peoples’ ability to access capital still remains difficult in that first-home owner bracket.”

An increase in raw material costs — and one-off shipping costs associated with the cancellation of import orders for materials given the softening volumes in Victoria — had also impacted the company’s performance.

On the civil side of the business, Mr Miller said the infrastructure pipeline in NSW, Victoria and South Australia remained robust but project delays had hit momentum among some projects. “There is not a lack of pipeline for major infrastructure projects. But there is a delay in those projects which is impacting even the projects we have on foot. There are delays in those for various reasons, whether weather or technical.”

The Adelaide Brighton chief also questioned whether companies procuring materials had the capacity to deliver to both ends of the market.

“If we talk to smaller contractors they are seeing a lack of smaller projects coming through,” Mr Miller said. “Whether that is a broader economic situation or procurers perhaps just haven’t got the capacity to deliver major infrastructure with grocery trade work that smaller contractors rely on.”

JPMorgan has previously forecast little let-up in the near term for building materials producers, with the malaise hitting the sector likely to persist into 2020.

Adelaide Brighton is a leading supplier to the construction, infrastructure and mineral processing markets. It is a top-two producer in the Australian upstream cement market and has a large lime operation across four facilities, supplying lime to alumina and gold producers in WA.