Profit Catalysts for Materials Sector; Five Stocks In Focus

  • Nov 14, 2019 AEDT
  • Team Kalkine
Profit Catalysts for Materials Sector; Five Stocks In Focus

An economy’s materials sector comprises of companies engaged in mining and refining of metals and minerals, chemical products (fertilisers, industrial gases, etc.) and forestry products. These basic products are processed and manufactured as raw materials to be used by other industries or companies that further develop finished goods for consumers.

Material sector companies are a key supplier to the construction market, which makes this sector highly susceptible to fluctuations in the business cycle. These companies tend to thrive when the economy is strong. Moreover, any shifts in the housing market have major repercussions for the companies in the materials sector that produce and provide raw materials for construction projects. A thriving construction market offers a conducive economic environment for the material sector companies to make profits.

Let’s look at the following five material sector stocks listed on the ASX.

Incitec Pivot Limited (ASX: IPL)

Incitec Pivot Limited is a diversified industrial chemicals company, engaged in the manufacturing and distribution of industrial explosives, industrial chemicals and fertilisers. The company primarily operates in Australia and North America.

FY19 Results: For the financial year ended 30 September 2019, the company reported Net Profit After Tax (NPAT) of $ 152 million, after $ 140 million of non-recurring items (net of tax), mainly due to the impact of the one in one-hundred-year flood event in north Queensland. The company’s NPAT in FY18 stood at $ 208 million, or $ 347 million excluding Individual Material Items (IMI).

Source: 2019 Profit Report

It was a challenging period for the company with EBIT for FY19 amounting to $ 304 million, after $ 197 million of non-recurring items, comprising of external event impacts of $ 131 million (including $ 115 million from Queensland floods) and manufacturing outages and other impacts of $ 66 million.

However, Incitec Pivot witnessed above market growth in US Explosives and strong performance in the Quarrying & Construction business. Fertilisers business was slightly impacted by dry weather and higher gas costs, but the underlying business fundamentals remain positive. The company expects improved operating cashflows in FY20.

Stock Performance: Incitec Pivot’s market cap is ~$ 5.6 billion with ~ 1.61 billion shares outstanding. On 14 November 2019 (AEST 12:42 PM), the IPL stock was trading at $ 3.495, up 0.143%. The YTD and last six-month return of the stock is 8.05% and 5.76%, respectively.

Orica Limited (ASX: ORI)

Commercial explosives and innovative blasting systems provider, ORI caters to markets including construction, mining, quarrying, and oil & gas. ORI also supplies sodium cyanide and provides ground support services.

FY19 Results: For the 12 months to 30 September 2019 (FY19), Orica recorded statutory Net Profit After Tax of $ 245 million as compared to a $ 48 million loss in FY18. The company’s underlying earnings per share for the year improved by 14% to 97.9 cents per share.

Orica’s manufacturing and cost performance continues to improve while all of its regions are delivering impressive performance including Europe, Middle East & Africa that reported a particularly pleasing result in FY19, resulting from the company’s consistent efforts to improve business. A final ordinary dividend of 33.0 cps (5.0 cents franked) was also announced for the period, which took the full year dividend to 55.0 cps.

Stock Performance: The market cap of the company is ~ $ 8.99 billion, while the total number of shares outstanding is ~ 380.58 million. On 14 November 2019 (AEST 12:44 PM), the ORI stock was trading at $ 23.520, down 0.466%. The stock has generated a positive return of 39.82% on a YTD basis and 20.07% in the last six months.

Boral Limited (ASX:BLD)

Boral Limited manufactures and supplies building and construction materials in Australia and internationally to the residential and commercial building markets.

Source: AGM Slides including 1Q Trading & FY2020 Outlook

FY19 Results: For the year ended 30 June 2019, the company reported a solid result, posting a 4% increase in revenues to $ 5.8 billion and a 2% increase in EBITDA to $ 1.03 billion for continuing operations. NPAT before significant items was around $ 440 million, reflecting a decline of 7% when compared with the last year. Statutory NPAT of $ 272 million included $ 168 million of post-tax significant items with a profit on sale of the Denver Construction Materials and Texas Block businesses more than offset by the $ 174 million impairment of the company’s investment in the Meridian Brick joint venture.

Boral’s FY2019 underlying performance was underpinned by strong Australian infrastructure activity, Headwaters acquisition synergies and benefits from cost savings and improvement initiatives across the business.

Stock Performance: The stock of BLD was trading at $ 4.965 on 14 November 2019 (AEST 12:45 PM), down 0.301% by $ 0.015. Boral’s market cap is around $ 5.84 billion with 1.17 billion shares outstanding. The stock has generated a return of 2.68% on a year to date basis, while its last six-month return stands at 4.84%.

Fletcher Building Limited (ASX: FBU)

Fletcher Building Limited manufactures, distributes and sells materials including wood fibre-based products, cement and aggregates, plasterboard, laminates, lumber, and aluminium extrusion for the building industry across Australia and New Zealand.

FY19 Results: For the concerned period ended 30 June 2019, Fletcher Building Limited recorded a stellar performance in New Zealand, experienced return to profitability, and successfully executed the first year of its five-year strategy targeted at refocussing and growing the business. The revenue from continuing operations amounted to $ 8,308 million, depicting an increase of 1% on FY18 while NPAT amounted to $ 164 million, a major improvement on the loss of $ 190 million recorded in FY18. The company paid a final dividend of 15 cents per share.

The EBIT before significant items was ~ $ 631 million, up from $ 50 million in FY18. The company balance sheet remains strong.

Stock Performance: Fletcher Building has a market capitalisation of around $ 4.03 billion. The FBU stock was trading on 14 November 2019 (AEST 12:47 PM) at $ 4.930, up 2.282% by $ 0.110. FBU has delivered a positive return of 6.64% on a YTD basis.

Orora Limited (ASX: ORA)

Orora Limited is engaged in the packaging of fibre, glass and beverages in Australia and Asia, in addition to offering distribution services in North America and Australia.

Source: Annual Report 2019

FY19 Results: Orora continues to deliver top line growth in challenging markets. The company’s underlying earnings per share was up 3.7% in the financial year ended 30 June 2019. Orora’s sales revenue grew by 12.1% to $ 4,761.5 million, and earnings before interest and tax (EBIT), excluding significant items, increased by 3.7% to $ 335.2 million. The company’s underlying NPAT before significant items increased by 4.0% to $ 217.0 million.

Statutory NPAT for FY19 was $ 161.2 million, including an after-tax significant item expense of $ 55.8 million. The expense included a $ 35.0 million expense for additional decommissioning costs associated with the former Petrie Mill site in Queensland and $ 20.8 million for restructuring and impairment charges.

Stock Performance: Orora’s market capitalisation stands at ~ $ 3.91 billion with ~ 1.21 billion shares outstanding. On 14 November 2019 (AEST 12:48 PM), the ORA stock was trading at $ 3.295, up 1.698%. The stock has delivered a positive return of 6.93% on a year to date basis.


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