The construction sector continued to expand for the third consecutive month in December but at a slower pace, a private gauge has found.
The sector, which was in contraction for three years, grew again last month as house building recorded its second-highest rate of expansion since the start of the Australian Industry Group (Ai Group)/Housing Industry Association Australian Performance of Construction Index survey in 2005.
"The recent spurt of growth in residential construction continued in December with ongoing strength in both apartment and house-building activity," Ai Group's public policy director Peter Burn said.
Mr Burn said low interest rates were supporting the construction sector and that the growth in new orders would boost confidence for builders and for the related manufacturing and service industries.
Two stocks set to benefit from a continued recovery in the housing construction sector are Boral (ASX: BLD) and DuluxGroup (ASX: DLX).
Boral is a leading building materials and construction player in Australia and an obvious pick to benefit from an improvement in the construction sector. Boral's construction materials and cement division accounted for 60% of the company's revenue in the 2013 financial year.
Boral achieved a 3% rise in net profit to $104 million for the 2013 financial year. It recently announced at its 2013 AGM presentation that it will focus on reducing capital expenditure and overhead costs in order to maximise cash generation. UBS analysts say the company has already targeted $105 million in cost savings, with the next phase of its project expected to generate further cost savings that should support earnings.
Boral recently announced a strategically significant US $1.6 billion plasterboard and ceilings joint venture with North American manufacturer USG that will deliver benefits to the company in terms of increased technology, product diversification and an improved balance sheet. The acquisition is important for the company in achieving long-term growth in Asia.
A continued improvement in the Australian and US housing construction sector should result in significant earnings improvement for Boral and therefore the share price has plenty of upside at current levels.
The DuluxGroup has a portfolio of premium-branded paints, coatings, home improvement and gardening products which dominates the Australian market.
Dulux achieved a 18.2% increase in net profit to $94.1 million for the 2013 financial year despite sluggish housing growth.
An increase in housing construction will see the company benefit. For the 2013 financial year, new housing accounted for 16% of the group's revenue. Further, the recent acquisition of garage door supplier, Alesco has increased the company's exposure to new housing construction activity. At current levels, I believe the share price has plenty of upside and is a good stock for a long-term hold given its dominant position in the Australian market.
Foolish takeaway
As the housing construction sector continues to expand, Boral and DuluxGroup will see improved earnings over the next few years. At current share price levels, both Boral and DuluxGroup have plenty of upside for investors.
