Rinker Group (RIN) has notched up a 52% increase in their first-half net profit after tax (NPAT) to US$366m, beating Macquarie Research Equities (MRE) estimate of US$341m. Guidance was also upgraded for the US business with trading earnings before tax (EBIT) now expected to be 35% above last year. Management also declared an interim dividend of 14c.
Volumes remain strong across Rinker's main markets, with no visible slowdown in housing yet experienced. Concerns over US housing remain front of mind for global investors but Rinker has confirmed MRE's expectations that the Florida, Arizona and Nevada markets continue to remain strong. It is expected that overall residential volumes will slow but engineering and non-residential volumes should offset this potential weakness.
Prices continue to be more important than volumes especially given the capacity constraint issues. Even if volume did increase over the next 12 months, Rinker is limited in its ability to service these increases because its operations are running at close to 100% capacity. The critical driver of profit over the next 12-24 months will be price increases. Rinker has announced that it will be putting through pricing increases in Florida during January of at least 10%. This will have flow-on effects to the FY07 year and should lead to upgrades across the market.
The strategy of expanding aggressively into concrete block and other concrete products has been hugely successful. Concrete-related businesses now make up over 50% of Rinker's US earnings. Margins in these businesses have expanded significantly as Rinker has taken advantage of the very strong pricing environment. Usually higher margins would attract new entrants but the barriers to entry (raw material feed, site approvals etc) remain so high that it is difficult to see this happening in the medium term. This segment of the business will continue to be a growth driver.
Large growth opportunities still elude Rinker but the buyback continues to chip away and the dividend has been increased by 100%. The balance sheet is still in very good shape with debt to debt + equity still below 10%. Free cashflow generation still remains very strong so this will continue to support organic growth.
MRE maintain an outperform recommendation. Strong fundamentals should start to outweigh sentiment and concern about the US housing market. RIN's exposure to strong markets, its diverse construction exposure and its solid balance sheet put it in a good position to further grow earnings.
MRE hold an $18.00 share price target, which is an 18% premium to yesterdays closing share price of $15.25. When combined with the annual yield of 2.2%, this represents a total shareholder return of 20.2%.
RIN Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
