MARKETS SPECTATOR: Building up Adelaide Brighton

JP Morgan has switched its preferred pick in the building materials space, upgrading Adelaide Brighton to overweight while downgrading the New Zealand-based Fletcher Building to neutral.

During the past quarter, Fletcher has enjoyed a very strong run, ranking near the top of the sector with a 15 per cent return, while Adelaide Brighton has been the laggard of the sector. The chart below shows the performance of both stocks over the past year, in particular the very strong outperformance from Fletcher Building over the last three months.

With a lot riding on a strong second half and its valuation now stretched, JP Morgan is no longer recommending Fletcher Building as its preferred exposure to the sector. Instead, it elevated Adelaide Brighton to its preferred sector pick and said the stock offers the highest expected total return in the group.



Source: Iress

"Market data suggests Adelaide Brighton is on a solid path in the second half of 2012. While its first half result fell below our expectations, recent data from the Australian Bureau of Statistics on cement and clinker has provided room for optimism on the outlook for the second half 2012.

"The September quarter was particularly strong for cement, which rose by 7 per cent against the pcp and is up 10.3 per cent in the year to date," JP Morgan said.

Given the company's considerable exposure to cement and the momentum evident in the latest Australia Bureau of Statistics, JP Morgan views Adelaide Brighton as its preferred pick in the sector. It notes that its total return estimate of 4.2 per cent is well ahead of the -2.6 per cent expected for the sector.