The Adbri Ltd (ASX: ABC) share price slumped after management posted a drop in profits even as revenue improved for the six months to 30 June 2022.
Strong demand from its construction and mining customers wasn't enough to offset rising costs and bad weather.
This is despite the construction materials and lime producer cutting costs and lifting prices for its product.
The news caused a 12% sell-off in the Adbri share price to $2.34 in early trade when the S&P/ASX 200 Index (ASX: XJO) slipped 0.2%.
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Summary of Adbri's 1HFY22 results
- Interim revenue increased to $812.4 million, up 8.0% on 1H21 driven primarily by strong construction and mining sector demand and improved pricing across most products
- Statutory net profit after tax (NPAT) decreased 15.0% to $48.1 million
- Underlying NPAT decreased 1.3% to $54.3 million on 1H21.
- The drop in NPAT was due to operational challenges associated with extreme wet weather events on the east coast of Australia; anticipated lower lime volumes; higher raw materials, shipping, transport, power and fuel costs
- Cost-out program delivered $7.5 million in gross savings for 1H22, only partially offsetting inflationary pressures
- Fully franked interim dividend of 5.0 cents per share, down from 5.5 cents per share in 1H21, equating to 70.6% dividend payout ratio of underlying earnings excluding property profits
Other key highlights to Adbri's interim profit results
Adbri is pursuing opportunities in the infrastructure construction market. The federal and state governments have committed billions to new road, rail and power projects.
The company said that it achieved a 29% win ratio on infrastructure tenders bid in the half. Its order book is also up around 30% since end of 2021.
Further, its lime business may be benefitting from shipping delays. Local customers are increasingly turning to Adbri to secure stable supply while Adbri's competitors struggle to import enough product.
However, the company's margin squeeze shows how competitive the building materials market is. This is unlike other S&P/ASX 200 Index (ASX: XJO) shares, such as Brambles Limited (ASX: BXB) and Amcor CDI (ASX: AMC), which are having an easier time managing costs pressures.
Management commentary
Adbri's managing director and chief executive officer, Nick Miller, commented:
We have delivered another period of top line growth, with increasing volumes across the majority of our product lines as strong demand continued in the construction and mining sectors, despite significant disruption to the business as a result of severe weather events on the east coast of Australia. The Company has actively managed its pricing strategy to partially mitigate significant inflationary pressures while continuing to execute our cost reduction program to deliver savings and protect earnings.
Outlook
Management backed away from providing a guidance for FY22 due to the uncertain trading environment.
But it did note that demand for its products is expected to stay strong in the second half. This is so much so that underlying earnings in 2HFY22 will be ahead of the same period last year.
What's driving the growth is its cement, concrete, aggregates, masonry, joint ventures and recent business acquisitions.
The company is also targeting circa $10 million in cost savings for the year and is looking to make more out-of-cycle price increases for its products.
Adbri share price snapshot
The Adbri's share price has fallen around 40% over the past year. In contrast, the ASX 200 index lost a more modest 5%.
But Adbri is in good company as other ASX building materials companies are also struggling. The James Hardie Industries plc (ASX: JHX) share price has lost 31% while the Boral Limited (ASX: BLD) share price has shed 55% over the same period.
