Macquarie Research Builders’ Boombox
31 January 2019 2
Phobophobia
The fear of fear itself. Our assessment of the market environment likely to face Building Materials
stocks in 2019 can best be described as a fearful one – but we think there is opportunity
nonetheless. In Australia, one is almost certainly going to see a contraction in building activity,
especially in the high-rise multi-residential sector. The extent of the declines and the breadth of the
slowdown does depend on a few factors, the impact of which are not yet fully evident. While
economic fundamentals are broadly in reasonable shape (employment, wages, etc) and population
growth continues to underpin demand, the uncertainty prevailing in the market flowing specifically
from credit availability is a key unknown. In the US, the market is slowing, but fundamentals remain
in favour of some growth, in our view. Early signs emerging from the market in 2019 are
encouraging. In the UK, all eyes are on the uncertain Brexit process, while the continent shows
signs of slowing. As a consequence, we continue to prefer stocks where a structural growth story
remains. Valuations are screaming value, but this could be a bumpy ride yet – our order of
preference: RWC, JHX, DLX (upgraded to Outperform), BLD.
A brutal retracement
The speed and extent of the sell-off in the sector in 4Q18 was startling. Stock valuations, both on a
relative and absolute basis, are almost uniformly at multi-year lows.
Fig 1 Breakneck price action
Fig 2 Valuations through the floor
Source: Factset, Macquarie Research, January 2019Source: Factset, Macquarie Research, January 2019
We think there are some good opportunities in the sector, but stock performance will be influenced
by a number of factors as we head into 2019:
Australia – need an arrester bed. The decline in confidence in the housing market has
been rapid. Feedback from builders points to the Royal Commission’s impact on credit
appetite (both banks, and then consumers). The reality is ultimately more complex than this
alone. We now risk a vicious cycle taking hold and the housing market driving a broader,
and potentially more destructive, slowdown. We think the days and weeks that follow the
release of the final Royal Commission report on 4 February are key – one needs to see a
concerted effort to re-establish some confidence, else the downside scenario becomes
more likely. As our macro strategy team suggests, the report could act as a ‘circuit breaker’
for lenders. The May election could bring new government – the direct impact of housing-
related policy changes should be muted, but uncertainty will likely be elevated in a general
sense. Choosing sub-markets, we continue to favour infrastructure-related exposure in Aus.
US – slower, but still growing. Rising house prices and increasing interest rates took hold
in 4Q18 to slow US demand. However, economic fundamentals remain broadly supportive
and the cycle is far from overheated. Early indications are that market conditions have
started to show early signs of improvement entering the spring selling season. Builders are
actively targeting more entry-level volumes, where demand indicators remain good and
supply has been thin. In our concurrent analysis of JHX, we focus on this dynamic at
length. We think the operating environment should remain supportive, and we generally
favour US exposure, as we have now for a third year running.
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
JanMa
y 1Se
p 1JanMa
y 1Se
p 1JanMa
y 1Se
p 1JanMa
y 1Se
p 1JanMa
y 1Se
p 1JanMa
y 1Se
p 1JanBM Index rel to ASX200 Ind
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30
JanMa
y 1Se
p 1JanMa
y 1Se
p 1JanMa
y 1Se
p 1JanMa
y 1Se
p 1JanMa
y 1Se
p 1JanMa
y 1Se
p 1JanBuilding Materials PER rel to ASX 200 Industrials (NTM)
Macquarie Research Builders’ Boombox
31 January 2019 3
Europe – Brexit simmers. Business conditions in Europe and the UK have become more
pertinent for the sector – just in time for a messy Brexit process and signs of a slowing on
the continent too. We think JHX and RWC should be able to navigate the issues effectively,
but depending on how Brexit finally unfolds, it remains a risk.
Under the microscope. At a micro level, there are a number of things on the go. The most
significant, in our minds, is the potential for BLD to announce its intent with the USG Boral
JV soon. We have updated our analysis of this event in a Boral note accompanying this
piece, concluding that it is potentially a positive catalyst for the stock. Management change
is another recurring theme, with new management taking the helm at JHX and ABC and
CSR seeking a new CEO.
Risks are many and varied. In Australia, we think the period immediately following the
Hayne Commission’s report will inform, to a reasonable degree, the trajectory the market
takes for the rest of the year. The period around the May election could also destabilise the
market for a time. In the US, the principal focus is on interest rates (we now expect only two
rate hikes in 2019), but there are a number of other uncertainties, with ongoing trade
tensions with China chief among these.
It would be easy to dismiss the sector as ‘simply too hard’, but we think this could miss some
opportunities at a stock level:
RWC – The stock is trading at its lowest rating since listing, being tarred by sector concerns
about housing activity, whereas its repair market orientation should shield earnings volatility. If
Brexit works out better than feared, this could also aid meaningfully. All the while, cost
pressures are receding, and we remain absolutely convinced of the penetration growth story.
JHX – There has been a lot of disappointment over an extended period from JHX. New
management assume the helm soon and, while there are some uncertainties, we think the
impact of operational, product and market strategies should be positive. Again, valuations are
at decade-long lows.
DLX – Upgrade to Outperform. DLX’s investment attraction lies in its resilience and consistent
growth through the cycle. Our analysis points to resilient revenue growth of the business over
a long period, including through the GFC and tough housing market conditions in 2012. The
heightened sense of uncertainty in the Australian housing market has played out in DLX’s
rating too. The stock now trades at a 9% premium to the ASX 200 Industrials, compared to a
five-year premium of 20%, so almost 2 standard deviations from the mean.
BLD – We see the strength of BLD’s position in relation to the USG Boral JV supporting
potential for a value-adding deal. However, given the complexity, there are a number of
scenarios that could play out – we evaluate these. We further expect ongoing broader market
support in the US, with BLD making progress in resolving fly ash supply disruptions as the
year progresses, while the Headwaters integration process remains supported by a
reasonable, albeit slower, residential market. In Australia, infrastructure market support
remains strong.
Fig 3 Results season preview – picking RWC as key performer
Source: FactSet, Company data, Macquarie Research, January 2019*
Anticipated movement in FY1 consensus EPS **
Adelaide Brighton is reporting FY18 results
StockDate of resultPotential result
surprise
Guidance for
result
MQeLikely Cons EPS
revision
direction *
MQe vs
Consensus (FY1
NPAT)
Comments on key expectations
James Hardie5 Feb 2019None
US$71.7m NPAT
(US$66.9m net
Fermacell costs); -5%
-1.3%
US housing activity still expected to grow. Recent cost
moderation to benefit 2H. Expect incoming CEO to provide
colour on strategic intent.
Boral25 Feb 2019None A$270.5m NPATA (A$245m NPAT);+14%-1.9%
Softer Aus resi market, but infra delays being overcome. US
weather could be a factor, but likely still positive on market
fundamentals. Progress on USG Boral JV decision.
Reliance Worldwide25 Feb 2019None
A$92.2m NPATA
(A$86.6m NPAT);
+122%
+5.8%
Ongoing growth avenues in US and UK, new products, JG
synergies and expanded channel network. Brexit
uncertainties pose a challenge, but manageable. Fx benefit.
Adelaide Brighton **28 Feb 2019
Underl. NPAT
(ex-prop) of
A$188-195m
A$190.2m NPAT (ex-
prop); +10% -1.1%
Key is introduction to new mgt. Likely to maintain broadly
supportive market commentary, but focus will be on price
expectations as resi slows.
Macquarie Research Builders’ Boombox
31 January 2019 4
US Housing – Mid-cycle slowdown
The US housing market experienced a slowdown through 2018. Despite solid economic
fundamentals, rising house prices and increased rates took their toll on affordability. However,
concurrently, supply side factors also played their part. The market remains pretty solid in lower
price/cost ranges, buoyed by demographics – strong growth in key age categories and improving
household formation. We lowered our assumptions for housing starts in the US late last year to low
single-digit assumptions but remain of the view that growth rebounds somewhat from the levels
experienced in 4Q18.
Macro outlook remains constructive
Our Macro Strategy team remain constructive on the outlook (US Economics - State of the Union:
Still Fortress America) for the US economy and the housing market. They expect 2019 real GDP
growth of 2.4% and a modestly slower 2.1% in 2020. Their rate profile has flattened somewhat,
expecting two rate hikes in 2H18 and a further two in 2020. They believe fears of a severe
slowdown in the US are overdone.
The house view is specifically positive about the consumer environment in the US. The team also
do not see structural risks in the housing market. While conceding that higher rates together with
supply side factors continue to constrain, the fact that residential investment’s contribution to GDP
remains low, at levels consistent with prior recession troughs, provides comfort. We factor low
single-digit growth in single-family housing starts into our estimates.
Fig 4 Residential investment share of GDP remains below its long-term average
Source: BEA, Macquarie Macro Strategy, January 2019
Single family has recovered more slowly than other housing investment
Breaking down residential investment into its categories illustrates that single family residential
investment has lagged, representing 36% of the total residential investment. All other
categories have shown significant strength in recent years, with particular strength from
improvements and multi-family construction.
Improvement spending has been growing at a 10% YoY pace over the four quarters to mid-
2018. This could also be a reason behind some housing softness – an overall trend towards
greater renovation activity. Today this comprises ~31% of residential investment whereas prior
to 2008 it was just ~22%.
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
1970197519801985199019952000200520102015
Residential investment as a shareof GDP
+1 STDEV
Avg
-1 STDEV
避免断更，请加微信501863613
避免断更，请加微信501863613。