ABC

ABC’s result is a sizeable miss to consensus.

Most of the damage was offset through price increases, which is a solid outcome, given extreme supply chain pressures, and raw material input price, but not enough.

Wet weather, for the result however, proved to be the final straw, and the margin loss was unrecoverable in aggregate for the half.

Buying 3 NSW/QLD based concrete/aggregate/masonry businesses into the worst weather events in 30 years on the east coast certainly didn’t help, given higher gearing met lower earnings and poor productivity. Management have suggested those acquisitions started to operate at pre-acquisition business plans, from July onward, given weather related improvements.

It seems fair to suggest, given ~50% cost recovery (based on the above graph) that the Macquarie conference back in May was the time to be a bit more explicit about how those cost recoveries were going, as per the May outlook statement below.

On the conference call, management noted they would be able to achieve higher earnings and margin expansion in the 2H, through repricings slated for September, and through normalised (or improved) weather related outcomes, but didn’t/wouldn’t put a number on aggregate EBITDA/EBITDA margins.

They also pointed to an improved EBITDA contribution from the acquisitions and from recently one infrastructure work, however, as it stands, without explicit guidance, and the uncertainty management point to from weather, from La Nina weather patterns, from volatility in energy markets, the conclusion would appear that consensus earnings estimates look unreachable given the required 2H lift, leading to sizeable negative eps revisions.

There was some interesting discussion about the infrastructure win rate. ABC, in the prior half, indicated that the bid-to-win rate was close on 50%, in this update that number was closer to 30%. Management indicated it is purely a timing issue, and that the win rate is pretty much unchanged. The increase in infrastructure, as a proportion of the overall business, is very important in our view given the eventual housing construction slowdown in calendar year 2023.

Capex is also running quite high, and will step up into the 2H. This is “as expected” given project plans (Kwinana upgrade) however it means the ABC will lean heavily on to the balance sheet.

Management indicated this was also “largely anticipated” and thus not really concern, however in our view the balance sheet will become quite stretched, as ND/EBITDA will move into the high 2’s, even with the seasonally stronger 2H cashflows, and the anticipated price rises/improvement-in-new-acquisitions.

Further bad news, a failure to execute, would likely require a capital raise.

Over the longer run, weather issues will normalise, supply chain pressures will abate, and we think ABC’s compelling valuation is compensation enough. There have been periods in which the market was, we think, obviously overpaying for exposure to ABC’s asset base, however, in the current period, we think it is now obviously underpaying.

And, on our numbers, to generate a total return of 7.5% pa over the next decade, the implied earnings trajectory requires no growth, over that of near term consensus. So, embedded expectations are rock bottom.

However, absent a takeover, there isn’t likely to be much in the way of good near term news, no particular reason to see multiple expansion, and as such we will be somewhat unhappy holders, for now.