Ann: Revised 2019 earnings guidance, page-30

ABC is a cyclical company, those that have used last 10yrs data are forgetting that property has been booming for 10+ yrs.
why not look at the 20/30yr data

For two reasons:

1. The construction cycle isn't the same as property cycle. The reason property prices rose so sharply from 2010 to 2017 was due, in large part, to a lack of supply to which the construction industry was only in a position to meaningfully respond only in the latter part of that period.

2. ABC is a fundamentally larger business today, with an asset base that is more than double what it was in 2002 (which was as far back as my modelling goes), a result of the company over that period:

- making acquisitions totally $400m (net of asset sales),

- investing cumulative capex of around $1.1bn, which is around $180m more than cumulative stay-in-business capital expenditure, and

- investing more than$250m in working capital.


"secondly for cyclical companies, the time to buy is not at the start of a downturn, but well into the downturn.
or another way, 15x bottom of the cycle earnings, all other factors being equal.
bottom of the cycle underlying earnings between 18c (current) and 10c ( wild guess)
equals buy in share price of between $1.50-$2.70.
not there yet, so I am still on the sidelines.
why buy so early???"

Yes, I agree that it is too early to buy the stock, but I think that while you may at some stage be able to buy it at $2.70, you'll will be waiting forever for a $1.50 price.

The reason being that your sense of what constitutes bottom-of-the-cycle earnings is flawed.

As the chart below shows, the last time ABC's EPS was anywhere near 10cps was in 2002, which - as discussed above - was when ABC was half the size that it is today in terms of operating assets, and it also coincided with a particularly severe slump in the construction industry.



I think that the other key takeaway from that chart is just how severe this year is shaping up to be compared to ABC's history.

I am more than happy to state that I think that ABC's earnings will not - absent any major tectonic event striking the economy - report EPS much below this year's projected 19cps (based on the mid-point of the $120m to $130m NPAT expectation).

Placing your 15x bottom-of-the-cycle P/E multiple (which I don't think is outrageous) on that bottom-of-the-cycle EPS figure, gives a purchase price objective of $2.90.

The issue for me is not so much about what the appropriate level is to purchase the stock; rather, it is what its financial performance looks like after it is purchased, i.e., what the shape of the cyclical rebound in earnings looks like.

Because I think there is a risk that the upside to earnings, when the cycle turns, will not be that significant given some of the structural changes in the cement market, especially in South Australia, where import competition had take root during the boom times.

And, as we know, once a new competitor appears in this kind of capital-intensive industry, with its long lead times, it takes a lot for that competitor to go away, if it ever does.

.