Adelaide Brighton unwinds along with housing construction

Building products supplier Adelaide Brighton is the latest victim of the great unwinding of housing construction in Australia, cutting its full year profit forecasts by nearly 30 per cent.

The company blamed “further softening of conditions in the residential and civil construction markets” for a substantial drop in its 2019 net profit forecast, while at the same time revealing a $100 million non-cash impairment.

Approvals for attached dwellings were down 30 per cent.Credit: AAP

It also scrapped its interim dividend, citing the need to conserve capital. The company now expects profit to between $120 million and $130 million, down from $190 million a year earlier.

One-off shipping costs from a redirected cement import order in Victoria, competitive pressures in Queensland and South Australia, and price hikes in raw materials were hurting its bottom line, the group said.

"We are operating in a fairly challenging market at the moment. Whilst the guidance is very concerning, the company remains well within its banking covenants," chief executive Nick Miller said.

The group’s shares fell 18 per cent to $3.54.

The downward revision to guidance should not have surprised investors given fresh figures released this week revealing new housing approvals have slumped to a six-year low over the year to June, a trough in construction activity that is putting substantial pressure on the economy.

Other buildings supply businesses were also marked down by investors in early trade. Shares in building behemoths Boral and CSR fell between 7 and 8 per cent in sympathy.

The housing approval figures reveal the dramatic shrinkage of an important sector underpinning the economy. Total approvals dropped by a fifth in the 2019 financial year.

Confidence among Australian home buyers has been showing recent signs of a recovery with prices bottoming out and auction clearance rates rising, but the improvement has not "come through to delivery on the ground," Mr Miller said.

About 60 per cent of the challenges faced by the company could be attributed to the state of the housing market, the remainder were internal issues, he said.

The group's shipping troubles in Victoria - it had to redeploy a ship filled with cement elsewhere - would cost it between $4 million to $6 million. It was also struggling to pass on a 10-15 per cent increase in the cost of aggregates through its ready mix cement business.

The sharp deterioration in housing approvals “will weigh on construction activity levels through to 2020,” according to JP Morgan analyst Brook Campbell-Crawford.

“This dynamic presents a tough backdrop for companies with leverage to domestic housing construction,” he said.

CSR and Adelaide Brighton are the most heavily exposed building suppliers. Around 53 per cent of CSR’s and 32 per cent of Adelaide Brighton’s revenue comes from the sector.

Another analyst report from Morgan Stanley suggests the real impact of the housing downturn is yet to be felt.

"Australian residential exposed building materials stocks have enjoyed a post-election bounce that we believe has come too early and ignores the pain yet to come in the group," the report's lead writer Andrew Scott said.

The worst of the downturn will hit this financial year and activity won't trough until late the following financial year in 2021, he said.

Adelaide Brighton said it was well within its banking covenants and would provide further details when it reports its interim result on 28 August.