On Friday building material manufacturer Adelaide Brighton Ltd (ASX: ABC) shocked investors when it announced that a major cement customer had decided to construct its own facilities for the supply of cement in South Australia. With SA being Adelaide Brighton's home state where it enjoys a solid and entrenched market position, its customer's move has certainly come as a surprise.
The customer loss is expected to lead to a decline of around 120,000 tonnes of cement and could affect the company's pre-tax profit by $15 million in 2016. It equates to a potential hit to net profit of around 7%, given the company just reported NPAT of $151 million for its financial year ending 31 December 2013.
The drop in Adelaide Brighton's share price means the stock has now significantly underperformed its peer group – which includes Boral Limited (ASX: BLD), James Hardie Industries plc (ASX: JHX) and Brickworks Limited (ASX: BKW) – over the past 12 months.
Foolish takeaway
Given the lead time involved in the contract loss, there is a good chance Adelaide Brighton's management will be able to find new avenues to replace the sales volume. It's important that management does, as maintaining high volumes is crucial to achieving efficiencies and maximising the leverage from the firm's high fixed cost base.
With the stock trading on a higher forecast dividend yield and lower multiple than many of its peer group, the market may have over-reacted and potentially created a long-term buying opportunity in this well-run business for investors who are prepared to look past the short-term gyrations.
