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Australia has swung into an infrastructure boom, with spending accelerating on roads, railways, runways, tunnels, dams and electricity generation and distribution facilities. Here are 3 players…

3 stocks to ride the infrastructure boom

James Dunn
25 October 2018

Australia has swung into an infrastructure boom, with spending accelerating on big-ticket public infrastructure – roads, railways, runways, tunnels, dams and electricity generation and distribution facilities. The infrastructure boom is taking over from mining construction, and as broker CommSec points out, the centre of construction activity is no longer Western Australia, Northern Territory and northern Queensland, but rather the growing population centres of south-east Australia.

Australia is spending more on infrastructure now than at any time in the past 30 years – almost $100 billion in the last financial year alone, according to the Reserve Bank of Australia (RBA). And the next few years are likely to be even bigger. Nationwide, the Australian Infrastructure Budget Monitor shows that almost $130 billion dollars is being invested in infrastructure on the eastern seaboard alone.

In Victoria, more than $100 billion worth of new roads, rail lines, hospitals, skyscrapers, prisons, wind farms and other infrastructure is being built or planned, Queensland has about $20 billion worth of work being done in Brisbane alone, and Western Australia has a $60 billion pipeline of infrastructure projects, according to CBRE, with $13 billion earmarked for projects in the Perth metropolitan area.

It’s a good time to be involved in supplying the infrastructure boom. Here are 3 players...

1. Boral (BLD)

Market capitalisation: $8 billion

Consensus estimated FY19 yield: 4.1%, 50% franked

Analysts’ consensus target price: $7.90 (Thomson Reuters), $7.55 (FN Arena)

Building products heavyweight Boral has been riding high recently on the back of the FY18 result released last month, which saw a 47% lift in net profit after tax (before amortization and significant items) and a very rosy outlook for the company’s Australian business, with the company predicting an “extraordinary next decade” in infrastructure, with what chief executive Mike Kane describe as an “amazing” amount of work on roads, highways, bridges, tunnels and airports. The stock market appears to believe that work in commercial, infrastructure and major projects activity should well and truly offset any impact from the residential property slowdown.

The major concern for analysts remains the company’s 2017 acquisition of US building supplies group Headwaters, which specialises in fly ash, a by-product of coal power stations that is used in concrete and other road making and building materials. Some analysts see Headwaters as a worryingly big bet at a crucial time in the US housing cycle, but Boral went a long way toward assuaging those doubts in the FY18 result by achieving US$39 million worth of synergies in year one, bettering its target of US$35 million.

Boral will be a major beneficiary of the Australian infrastructure boom, which could well be swelled by election promises: there is a New South Wales state election in March, and Federal elections must happen before November 2019. Analysts see plenty of scope for Boral’s share price to rise. 

2. Adelaide Brighton (ABC)

Market capitalisation: $4 billion

Consensus estimated FY19 yield: 4.7%, fully franked

Analysts’ consensus target price: $6.02 (Thomson Reuters), $6.04 (FN Arena)

Australia’s biggest cement maker, Adelaide Brighton, is also very well-placed to ride the tailwind of booming infrastructure spending by governments on projects including roads, tunnels, bridges and freeways. Adelaide Brighton has been able to lift its prices in recent years – as indeed has Boral – and thus boost its margins, and it should be able to continue that trend as infrastructure spending surges.

Adelaide Brighton has said that the infrastructure boom on the eastern states is taking over from a slowing housing sector as the prime driver of the company’s profits, and that momentum is building in its business. The residential housing sector makes up 31% of Adelaide Brighton’s revenues, while engineering and infrastructure makes up 34%: commercial building represents 24%, while the mining industry is at 11%.

However, the company’s recent half-year result (ABC uses the calendar year as its financial year) was treated by the market as a touch disappointing: first-half profit met expectations, but despite the company’s bullishness on market conditions, the guidance for full-year net profit was weaker than expected, at $200 million–$210 million – a contradiction that saw brokers lowering profit estimates and price targets, thus hurting the share price. The market was also concerned by the fact that both the chief executive officer and chief financial officer are leaving the company. Adelaide Brighton is a decent yield-payer, but is not seen as being as attractive on price grounds as Boral.

3.  Global Construction Services (GCS)

Market capitalisation: $144 million

Consensus estimated FY19 yield: 7.4%, fully franked

Analysts’ consensus target price 88 cents (Thomson Reuters)

 The Western Australian-based Global Construction Services is about to change its name to SRG Global, having merged with fellow Perth company SRG to create an engineering, construction and maintenance business. GCS is a supplier of integrated on-site products and services to the engineering, construction and maintenance industries. It is involved through the entire lifecycle of a project and provides the onsite workforce and site accommodation, scaffolding and access, plant and equipment, formwork and concrete, and specialised site services.

GCS has successfully expanded into the east coast market, particularly Victoria, where it has several major customers, including Multiplex, BGC Contracting and Lendlease. Last month the company secured $24.6 million worth of concrete structure works with Watpac Construction on two major building projects in Victoria – the construction of Deakin University’s new Law Building and the four-storey Melbourne Data Centre. GCS has timed this transition particularly well. Since entering Australia’s east coast construction market in mid-2017, the company has won more than $63 million worth of work and has more than $600 million worth of work in the contract tender pipeline. CGS has a particularly strong business in cladding rectification work, which has recently received a lot of attention

GCS is coming off a buoyant FY18, in which it lifted revenue by 33% to $247.5 million, boosted net profit by 25% to $13.6 million, and more than doubled its fully franked dividend, to 4.5 cents. The order book is healthy and the balance sheet is also strong, with a net cash position. On consensus, Thomson Reuters has analysts expecting 6.9 cents in earnings per share (EPS) in the current financial year, and a fully franked dividend of 4.8 cents. That prices GCS at 9.4 times expected earnings, which analysts see as cheap – hence the 26% discount to the consensus target price.

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