Three companies exposed to the housing slump
Between 2012 and 2016, mortgage lending standards were relaxed fuelling a domestic property investing boom. Together with a surge in offshore buying interest, a property and construction boom led to oversupply and frequent warnings from your author. The oversupply is now hitting the property market at the same time that bank lending standards have been tightened, property prices are falling, quality has been found wanting and building approvals have plunged.
While it’s true that auction clearance rates are rising, the fact remains that the economy needs more residential construction activity, not the sale of established dwellings. More importantly, national new ‘for sale’ listings volumes for the 28 days ended September 1 were down 16.8 per cent.
The sharp decline in building approvals will be followed by a sharp decline in construction activity as builders complete homes that were ordered a year or so ago. There is simply going to be a lot less new work, if approvals for future buildings are already a third lower than a year ago.
Because the residential construction industry employs 3.5 per cent of Australia’s workforce the lower incomes to be earned by chippies, sparkies, plumbers, brickies, tilers, painters and plasterers will be felt by the economy sufficiently for the RBA to be worried. That’s why they’re cutting rates. However, rate cuts aren’t sufficient to offset declining incomes, poor quality and oversupply to spur buyers to order new homes. No wonder the RBA is asking the government to spend more on infrastructure.
For companies directly exposed to new home construction activity conditions might become tougher before they improve.
Fletcher Building (ASX:FBU)
Fletcher Building, generates a third of its revenues from a portfolio of businesses including Tradelink plumbing and bathroom supplies, Iplex pipes, Rocla concrete and Stramit steel. The recent sharp decline in the Australian residential market saw EBIT fall 50 per cent in 2019. Fletcher is now cutting costs to stabilise the business. Cutting costs should be a daily discipline not part of a ‘restructuring’ and returns on equity are in single digits suggesting the balance sheet assets might be overvalued.
Adelaide Brighton Cement (ASX:ABC)
Approximately 30 per cent of Adelaide Brighton’s revenues is generated from residential housing activity. Half year revenues fell 6.3 per cent to $755.7 million and net profits fell to a loss of $17.9 million compared to a profit of $84.5 million for the prior corresponding period highlighting operating leverage. While management is hopeful of offsetting strength from mining and infrastructure, we note the iron ore prices are falling as are the share prices of large materials companies.
CSR Limited (ASX:CSR)
CSR produces Bradford insulation, PGH bricks, Gyprock plasterboard and Hebel precast concrete blocks. Reflecting the company’s exposure to residential construction, net sales the Building Products division fully participated in Australia’s construction boom with net sales up almost 60 per cent between 2013 and 2019. The decline in residential building approvals however will have the reverse effect and operating leverage may also impact margins.