Adelaide Brighton (ASX:ABC)

Martin Brydon
MD & CEO
Market Cap (AUD): 3.53B
Sector: Materials
Last Trade (AUD): 5.31 -0.11 (-2.03%)
Tab Bar

1. About

 

Adelaide Brighton is one of Australia’s leading integrated construction materials and lime producers.

The Company supplies a range of products to the building, construction, infrastructure, and mineral processing markets throughout the country.

Adelaide Brighton's principal activities include the production, importation, distribution, and marketing of clinker, cement, industrial lime, premixed concrete, construction aggregates and concrete products.

Established in 1882, Adelaide Brighton is now an S&P/ASX100 company. The Company has approximately 1,500 employees and operations in every state and territory in Australia.[1]

2. Business model

 

The Company operates the following divisions:[2]

 

Divisions

Revenue ($’M)

% of Revenue

% of Profit (before Int. & Tax)

Profit drivers[3]

Cement, Lime, Concrete and Aggregates

$1,401.4

90.5%

107.5%

  • Cement & clinker sales volume increased 9%
  • Concrete volumes increased by more than one-third in 2017 on strong east coast demand and acquisitions
  • Aggregate volumes strong due to acquisitions, existing volumes stable, average prices up >5%. Revenue, EBIT and margins in existing business improved significantly on higher volumes, strong pricing outcomes and control of costs
  • Concrete and aggregates strategic acquisitions – $85.2m investment
  • Average selling prices lower due to pricing
    mechanism with major customers that reflects recent production cost savings (mainly natural gas in 2016)
  • Lime sales volumes down slightly in 2017 due to reduced sales to non-alumina sector

Concrete Products

$147.6

9.5%

3.8%

  • Revenue down 1.1% to $147.6m. Retail sales remained positive, commercial impacted by project timing and multi-residential weaker
  • EBIT down from $11.4m to $10.2m in 2017 due to lower sales volumes and resulting lower production efficiency

Unallocated

N/A

N/A

(11.4%)

N/A

3. Strategy

 

Key strategies include:[4]

 

Adelaide Brighton’s highly focused strategy

Consistent long-term strategy delivering returns

Cost reduction and operational improvement across the business

  • Best practice operational performance
  • Import strategy to maximise asset utilisation
  • Focus on energy usage and procurement

 

Grow the lime business to supply the resources sector

  • Unique resource and cost position
  • Long-term customer contracts and growth
  • Continuous improvement to maintain cost leadership

 

Focused and relevant vertical integration

  • Operational performance to realise long-term value
  • Targeting strategic aggregates positions
  • Strong emphasis on shareholder value creation
  • In 2018, Adelaide Brighton expects strong demand for construction materials, improved pricing, and further efficiency improvements. Sales volumes of cement and clinker are anticipated to be higher, with stable demand in Western Australia and the Northern Territory and improving demand in South Australia and the east coast.
  • Lime sales volumes are expected to be slightly lower in the non-alumina sector, although prices are anticipated to improve under contractual arrangements.
  • Its joint venture operations in Australia are anticipated to continue to benefit from stronger demand and higher prices on the east coast.
  • Its costs are expected to improve with further savings from the Angaston plant cement rationalisation and rolling operational improvement program.
  • Import costs are likely to be $3 million higher in 2018, with increased materials costs offset by favourable foreign currency outcomes, and energy costs are expected to rise $6 million in 2018.
  • Estimated proceeds from the sale of land in the next 10 years could realise in excess of $100 million, however due to project timing, no significant land sales are expected until 2019.
  • Adelaide Brighton aims to optimise shareholder returns by maintaining an efficient balance sheet while retaining the flexibility to fund long-term growth opportunities. Prudent capital management will remain an important part of this approach.

4. Markets

 

The Company operates in markets including:[5]

 

Industry (Australia)

Industry Revenue

Growth Rate (annual 13-18)

Ready-Mixed Concrete Manufacturing

$6 billion (2017)

(1.1%)

Concrete Product Manufacturing

$2 billion (2017)

(0.5%)

Cement and Lime Manufacturing

$3 billion (2018)

1.5%

5. Competition

 

Major competitors include:[6]

 

  • Boral Limited (ASX:BLD)
  • Fletcher Building Limited (Australia) (ASX:FBU)
  • CSR Limited (ASX:CSR)

6. History

 

1882[7]

Established in 1882, Adelaide Brighton is now an S&P/ASX 100 company

 

1891

William Shearing and William Lewis erected an experimental Cement plant

 

1900

Over the following decade, The S.A. Portland Cement Company flourished, growing in size and in stature

 

1930

As a result of this direct competition, the S.A. Portland Cement Company took steps to increase production by refitting much of its plant, and increasing the number of employees to 104

 

1960

S.A. Portland Cement Company had only made two types of cement, ‘normal’ and ‘high early strength’, the later having been introduced in 1929

 

1970

3 weeks of intense movement on the Stock Exchange, ‘Adelaide’ announced that it had secured more than 75% of the ‘Brighton’ shares

 

2003

Adelaide Brighton Ltd has agreed to acquire 55% of the concrete masonry products company C&M Brick Pty Ltd (C&M) and 100% of the Rocla Pavers and Masonry (RPM) business of Rocla Pty Ltd

 

2008

Acquired the concrete products company Hanson Building Products Pty Ltd

 

2012

Acquired at 30% Stake in AALBORG Portland Malaysia SDN. BHD

 

2013

Adelaide Brighton has entered into a contract with major alumina producer for the continued long-term supply of 100% of their lime requirement in Western Australia

 

2014

Renewal of Major South Australian Cement contract

Acquired Direct Mix Concrete and Southern Quarries (“DMC”)

Completed downstream acquisition in South Australia and Queensland and renewal of long-term cement supply agreement

Adelaide Brighton announced a potential change to its South Australian cement supply arrangements

 

2015

Adelaide Brighton advised that it has executed an agreement securing ongoing supply to a major cement customer in Western Australia for a term of three years until 31 December 2017

Adelaide Brighton concluded two land sales

 

2017

Acquisition of Central Pre-Mix Concrete and Quarry Completed

Adelaide Brighton strengthens energy portfolio

 

2018

Adelaide Brighton signs major SA cement contract

7. Team

 

Board of Directors[8]‚Äč

 

Zlatko Todorcevski – Chairman

Martin Brydon – Managing Director and CEO (Will Retire)[9]

Raymond Barro – Director

Ken Scott-Mackenzie – Director

Arlene Tansey – Director

Vanessa Guthrie – Director

Geoffrey Tarrant – Director

 

Management Team

 

Martin Brydon – Chief Executive Officer and Managing Director

Michael Kelly – Chief Financial Officer[10]

George Agriogiannis – Executive General Manager, Concrete and Aggregates

Andrew Dell – Executive General Manager, Concrete Products

Brad Lemmon – Executive General Manager, Cement, and Lime

Michael Miller – Executive General Manager, Marketing and International Trade

Marcus Clayton – General Counsel and Company Secretary

Dimity Smith – Executive General Manager, Human Resources and Health Safety and Environment


read more

8. Financials

 

2018 Half Year Results Presentation

 

Financial Year 2016/17 (ended 31 December):[11]

 

Divisions

Revenue ($’M)

% Change

Profit (before Int. & Tax) ($’M)

% Change

Cement, Lime, Concrete and Aggregates

$1,401.4

15.2%

$286.6

(0.4%)

Concrete Products

$147.6

(1.1%)

$10.2

(10.5%)

Unallocated

N/A

N/A

($30.3)

8.5%

Total

$1,549.0

13.4%

$266.5

0.2%

9. Risk

 

Major risks include:[12]

 

There are a number of risks to which the Plan exposes the Company. The more significant risks relating to the defined benefits are:

Investment risk - The risk that investment returns will be lower than assumed and the Company will need to increase contributions to offset this shortfall.

 

Salary growth risk - the risk that wages and salaries (on which future benefit amounts will be based) will rise more rapidly than assumed, increasing defined benefit amounts and thereby requiring additional employer contribution.          

 

Legislative risk -the risk that legislative changes could be made which increase the cost of providing the defined benefits.

 

Financial risk management

Market risk

Foreign exchange risk

The Group’s activities, through its importation of cement, clinker, slag and equipment, expose it to foreign exchange risk arising from various currency exposures, primarily with respect to the US Dollar and the Japanese Yen. Foreign exchange risk arises from commitments and highly probable transactions, and recognised assets and liabilities that are denominated in a currency that is not the entity’s functional currency. The risk is measured using sensitivity analysis and cash flow forecasting. The Group enters into Forward Exchange Contracts (FEC) to hedge its foreign exchange risk on these overseas trading activities against movements in foreign currency exposure to the Australian Dollar. FECs are entered into for a duration in line with forecast purchases and currency matched to the underlying exposure. Ineffectiveness of the hedge can arise primarily from changes in the timing of foreign currency payments compared to the duration of the FEC. The Group treasury risk management policy is to progressively hedge up to 100% of material highly probable purchases for up to nine months forward on a rolling basis. Longer dated hedge positions are deemed too expensive versus the value at risk due to the respective currencies’ interest rate spread.

 

Electricity price risk

The Group’s electricity purchases include market based pricing mechanisms, exposing cash flows to future movements in the underlying price of electricity in certain markets. Electricity price risk is assessed on the basis of forward projections of the Group’s electricity demand and forecast market pricing to calculate a Value At Risk (VAR) measure. Hedging the price risk is considered when the VAR outweighs the cost of risk mitigation alternatives. The Group considers and utilises where effective, futures electricity price caps (Caps) to manage this risk exposure. Caps are available for the relevant markets that the Group has price risk, matching the underlying price exposure of the Group. Ineffectiveness of the hedge arises from differences in the quantity of actual electricity purchases compared to the nominal quantity of the hedging instrument.

 

Interest rate risk

The Group’s main interest rate risk arises from bank borrowings with variable rates which expose the Group to interest rate risk. Due to the historically low levels of gearing, Group policy is to take on debt facilities on a one to five year term with fixed bank lending margins associated with each term. Cash advances to meet short and medium term borrowing requirements are drawn down against the debt facilities on periods up to 90 days, at a variable lending rate comprising the fixed bank margin applied to the daily bank bill swap rate effective at the date of each cash advance. During both 2017 and 2016, the Group’s borrowings at variable rates were denominated in Australian Dollars. The Group analyses its interest rate exposure on a dynamic basis. Periodically, various scenarios are simulated taking into consideration refinancing, renewal of existing positions, alternative financing and hedging. Based on these scenarios, the Group calculates the impact on forecast profit and loss of a defined interest rate shift. The scenarios are run only for liabilities that represent the major interest-bearing positions

 

Credit risk

Credit risk is managed on a Group basis using delegated authority limits. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions, and financial guarantees. Financial guarantees are only provided in exceptional circumstances and are subject to approval in accordance with the Board approved delegated authorities.

For banks and financial institutions, only independently rated parties with investment grade rating are accepted. Derivative counterparties and cash transactions are limited to high credit quality institutions. For trading credit risk, the Group assesses the credit quality of the customer, taking into account its financial position, past experience, external credit agency reports and credit references. Individual customer risk limits are set based on internal approvals in accordance with delegated authority limits set by the Board. The compliance with credit limits by credit approved customers is regularly monitored by line credit management. Sales to non-account customers are settled either in cash, major credit cards or electronic funds transfer, mitigating credit risk. In relation to a small number of customers with uncertain credit history, the Group has taken out personal guarantees in order to cover credit exposures. From the 1 August 2016, the Group commenced using credit insurance for selected accounts with a credit limit exceeding $0.25 million. The maximum liability insured is capped at $14 million. The Company applies the simplified approach to providing for expected credit losses prescribed by AASB 9, which permits the use of the lifetime expected loss provision for all trade receivables.

In late 2017 the Group became aware of certain financial discrepancies which relate to transactions whereby it has been underpaid for products supplied to customers. The Group has now completed analysis with the assistance of forensic accountants KPMG and as a result, an additional provision of $17.1 million for the impairment of trade receivables was recognised in the balance sheet as at 31 December 2017. While the financial impact of the discrepancies has been quantified, investigations are continuing. The Company is also continuing its efforts to recover amounts due.

 

Liquidity risk

The ultimate responsibility for liquidity risk management rests with the Board which has established an appropriate risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group’s Corporate Treasury Function manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring the forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Included below is a statement of credit standby facilities that the Group has at its disposal to further reduce liquidity risk.

References

  1. ^ http://adbri.com.au/aboutus#profile
  2. ^ Annual Report 2017, P. 77
    https://www.listcorp.com/asx/abc/adelaide-brighton/news/2017-annual-report-to-shareholders-1862981.html
  3. ^ Investor Presentation 2017, P. 09-11
    https://www.listcorp.com/asx/abc/adelaide-brighton/news/presentation-december-2017-financial-result-1826339.html
  4. ^ Investor Presentation 2017, P. 27
    https://www.listcorp.com/asx/abc/adelaide-brighton/news/presentation-december-2017-financial-result-1826339.html
    Annual Report 2017, P. 06-07
    https://www.listcorp.com/asx/abc/adelaide-brighton/news/2017-annual-report-to-shareholders-1862981.html
  5. ^ http://www.ibisworld.com.au/industry/default.aspx?indid=215
    http://www.ibisworld.com.au/industry/default.aspx?indid=216
    http://www.ibisworld.com.au/industry/default.aspx?indid=213
  6. ^ https://www.investsmart.com.au/shares/asx-bld/boral-limited
  7. ^ http://www.adelaidebrighton.com.au/about-us
    http://www.asx.com.au/asxpdf/20030619/pdf/00366227.pdf
    http://www.asx.com.au/asxpdf/20080701/pdf/319xlzq00r0sgp.pdf
    http://www.asx.com.au/asxpdf/20121206/pdf/42bs9zvn2tz0n0.pdf
    http://www.asx.com.au/asxpdf/20131101/pdf/42klk9874vkjwd.pdf
    http://www.asx.com.au/asxpdf/20141209/pdf/42vc4bnd5zhndf.pdf
    http://www.asx.com.au/asxpdf/20141007/pdf/42sqnclqc5gbrn.pdf
    http://www.asx.com.au/asxpdf/20140930/pdf/42skr3k7d8pm6l.pdf
    http://www.asx.com.au/asxpdf/20140806/pdf/42r9kw5lpxfc8m.pdf
    http://www.asx.com.au/asxpdf/20140314/pdf/42ncx8pkvb20vh.pdf
    http://www.asx.com.au/asxpdf/20150216/pdf/42wm8cr6clv1pm.pdf
    http://www.asx.com.au/asxpdf/20151229/pdf/4343q4h357y14v.pdf  https://www.listcorp.com/asx/abc/adelaide-brighton/news/acquisition-of-central-pre-mix-concrete-and-quarry-completed-1539003.html
    https://www.listcorp.com/asx/abc/adelaide-brighton/news/adelaide-brighton-strengthens-energy-portfolio-1751035.html
    https://www.listcorp.com/asx/abc/adelaide-brighton/news/adelaide-brighton-signs-major-sa-cement-contract-1865961.html
  8. ^ http://adbri.com.au/aboutus#directors-exp
    http://adbri.com.au/aboutus#executive-team-exp
  9. ^ https://www.listcorp.com/asx/abc/adelaide-brighton/news/adelaide-brighton-appointment-of-chairman-and-ceo-succession-1887682.html
  10. ^ https://www.listcorp.com/asx/abc/adelaide-brighton/news/resignation-of-additioinal-company-secretary-1979331.html
  11. ^ Annual Report 2017, P. 77
    https://www.listcorp.com/asx/abc/adelaide-brighton/news/2017-annual-report-to-shareholders-1862981.html
  12. ^ Annual Report 2017, P. 96-98, 107
    https://www.listcorp.com/asx/abc/adelaide-brighton/news/2017-annual-report-to-shareholders-1862981.html