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18 January 2021 | Buy

BUY | Adbri Limited


A concrete opportunity

Adbri Limited (ASX:ABC)

Since receiving better than expected news on the COVID-19 vaccine front in November (materially improving the medium-term outlook for global economic activity and recovery) we have seen a significant rotation in global markets away from high growth/high earnings multiple companies towards more cyclical, economically sensitive sectors and firms. While the path forward remains uncertain, and undoubtedly the present situation is dire, we do believe the move in markets is one that is likely to continue for some time.

As such, building materials maker Adbri Limited (ABC) – formerly known as Adelaide Brighton Cement – offers attractive exposure to this thematic having experienced a very difficult period in 2020.

Concerns about the impact of COVID-19 on construction activity and depressed commodity prices (ABC’s largest end-market are mining companies, as their products are used both in mineral processing and project construction) had already prompted a substantial decline in ABC’s share price before news in July that Alcoa had cancelled a WA lime contract worth around $70m per year for ABC.

Fast forward five months and much has changed. The Federal Government’s stimulus budget in November proved a clear positive for small to medium-sized local infrastructure projects (less likely to suffer delays) boosting potential demand for ABC’s materials, as will the rebound in housing construction markets seen recently.

However, it has been the resurgent move in commodity prices that is arguably likely to have created the greatest positive, as undoubtedly miners have shifted to maximise production and restart new project investment in response to the lucrative prices now seen.

ABC is due to release the results of an internal review (response to Alcoa contract loss) in the coming weeks, and we believe that while clearly, the loss is a negative, other developments since that time can help partially, if not fully, offset the hit.

Based on current analyst reports, it appears this is not a consensus, and ABC’s share price remains 20% below its levels earlier in the year (when commodity prices were lower than present levels), and less than half the price they traded at in late 2018.

We believe the improved global economic outlook warrants selective additional exposure to more cyclical industries such as building materials within a well-diversified portfolio. We acknowledge the near-term risk associated with the review release. Accordingly, we view investing in a considered initial position, with a view to potentially adding later should volatility post its release present an opportunity to do so at even more attractive levels, an optimal approach.



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