You could say that Adelaide Brighton Ltd. (ASX: ABC) has dug deep so far this year, with significant improvements in almost all business metrics. Even more compelling is the fact that today's performance simply laid the foundations for better performance in the future.
The What:
- Revenue rose 12.6% to $678.1m
- Net Profit After Tax (NPAT) rose 61.3% to $82.6m
- Excluding property transactions, underlying* NPAT up 17% on modest margin growth
- Dividend payout of 8 cents per share + 4 cents special dividend, up from 7.5 cents in 2014
- Net debt of $346m (gearing of 29.8%)
- Cash at bank of $44m
- Guidance for 2015 to be better than 2014, expecting underlying NPAT of $200-215m, incl $32m profit from property transactions
*management's preferred measure of profitability, excludes one-off costs of $0.4m in the first half of 2015
So What?
Cement, clinker, lime, concrete and aggregate volumes all increased in the first half of the year, as did prices and operating costs for many of these. On the whole, margins look to have stayed the same as higher input and import costs were offset by lower interest expenses, energy costs, improved efficiency, and volumes.
The ability to maintain margins is a good sign for the company though it is worth noting that some factors such as lower interest rates, foreign exchange impacts, and energy costs are largely outside the company's control.
In their full-year outlook for 2015, management identified: "Potential transport cost savings in excess of $4 million from lower fuel costs" and "full year import costs estimated to increase by approximately $7 million versus the prior year" which shows the degree to which profits ($82m total) can be impacted by market factors.
Cost saving activities are expected to deliver around $7m in savings for the full year.
Now What?
Mixed conditions brought on by differences in the various markets where Adelaide Brighton sells its products make it difficult to evaluate appetite for construction materials. For example, average realised cement prices are set to be lower due to sales into lower-margin markets, yet overall cement volume is to rise from new contracts and increasing demand.
This kind of situation makes the business and new acquisitions or expansions harder for shareholders to value. However, I like management's approach, which seems to take the 'make 100 x 1% improvements' view rather than making a smaller number of bigger changes. This allows for investors to get a clearer view of the company and I believe it is more conducive to building a successful long-term business as well.
The question over what price to pay is a little more tricky and depends on your view of domestic construction demand. I think that energy prices and interest rates are likely to rise, while construction will moderate over the medium term. The Australian dollar will also remain weak which could impact earnings on imports.
Potential pressure from factors outside Adelaide Brighton in the future mean that I would look for a meaningful discount to today's prices before making a purchase, though I believe this cement maker is a solid company to own for the long term.
