Adelaide Brighton

If you must own a building materials company, then Adelaide Brighton has its attractions. The company is Australia’s largest producer of lime and its second-largest producer of cement, with its 19% operating margin the envy of competitors (by way of comparison, Fletcher Building’s margin is 6%).

Adelaide Brighton’s debt levels are also reasonable, with a net debt-to-equity ratio of 31% and interest cover of 12 times. Then there’s the fact the Barro family – which currently owns 30% of the stock – has been creeping up the register. With owner-managers in charge, the company has avoided its competitors’ acquisition disasters.

But will the tailwinds keep blowing? Cement is a key ingredient in concrete and a great deal of the stuff has been consumed by the resources boom. This makes Adelaide Brighton’s PER of almost 15 look a little steep, particularly as free cash flow hasn’t been stellar.

Demand from the resource industry has been offsetting weak activity in residential and non-residential construction. In the year to 31 December 2012, revenue rose 7% to $1,176m, although net profit grew by only 4% to $154m as the carbon tax began to bite. The total dividend for 2012 was 16.5 cents per share, the same as in 2011.

As with so many stocks, Adelaide Brighton’s cyclicality has been obscured by the resources boom. Waiting for the cyclicality to rear its head seems wise. AVOID.