Deutsche Bank has upgraded Australian building materials supplier Adelaide Brighton to hold from sell, citing recent share price underperformance. However, Deutsche continues to have concerns around the potential for more contract losses. The broker says Adelaide Brighton is trading on a multiple of 13.3 times earnings – broadly in line with its historical 12-month ratio of 12.9 times.
"Upside risks include better pricing outcomes for lime and cement and a faster-than-expected improvement in the mining and engineering sectors in Western Australia," Deutsche says. "Downside risks include weaker pricing outcomes (driven by competition and weaker Australian construction demand)."
Adelaide Brighton reported a 3.9 per cent rise in first-half revenue to AUD602m, as improved pricing and increased cement from the residential sector on the eastern seaboard offset a decline in project volumes in South Australia and a reduction in lime sales volumes. Overall cement and clinker sales volumes decreased by 1.9 per cent YoY.
Cement Australia is one of Adelaide Brighton’s major customers in SA and WA. However, it is not expected to extend its supply agreement beyond 2015-16 and intends to expand storage and loading facilities in Osborne (SA) and bring in its own volumes. At present, Cement Australia buys around 12,000t of cement from AdBri in SA, where the latter operates the state's only clinker unit.