Antares Equities discuss the roller coaster for building material stocks

Funds Management

by Clive Tompkins

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Antares Equities Investment Analyst and Deputy Portfolio Manager Jennifer Lam talks about how lofty earnings expectations from the infrastructure boom have not been met in Australia, and how the US infrastructure story compares.

Jessica Amir: Hello. I'm Jessica Amir for the Finance News Network, at Antares, with investment analyst and deputy portfolio manager of large caps, Jennifer Lam. Jennifer, welcome to the network.

Jennifer Lam: Thanks, Jessica. Thanks for having me.

Jessica Amir: Thanks for coming. First up, just give us an introduction to yourself.

Jennifer Lam: I'm an investment analyst. I've been with Antares for six years now and I cover a number of sectors, being agriculture, building materials, chemicals, gaming, and utilities. Recently I became the deputy portfolio manager for the large company strategy as well.

Jessica Amir: So zooming in on building materials, what are the real buzz words in this space at the moment?

Jennifer Lam: The key buzz word for the last few years for building materials: infrastructure. If you pick up the newspaper recently, you see that governments keep announcing new projects. Over the past few years, there's been expectation that infrastructure, when it comes, will deliver strong volume growth, pricing power, strong earnings uplift, and also margin expansion for these building material stocks. Finally, that boom is here with us today, however if you look at the earnings over the past 12 months, I would say those lofty expectations on these factors have not been met and have disappointed. It's a case of, yes, we have seen gains in volumes and revenue, but it has come with some pain as well for these companies.

Jessica Amir: So what are the real sources for disappointment?

Jennifer Lam: One will be pricing power. There's been a lot hope that with these kind of levels of demand, these companies can price up, but unfortunately, that has not been the case and there's a perennial issue with the industry, that despite the demand, we have not seen solved. Also, construction activity levels being so strong in the east coast Australia, we've seen cost pressures, so labour costs going up, you're paying more for haulage, more overtime, and of course the topical item of energy, so gas, electricity, transport fuel. These guys are big users of energy, so like you and I, their energy bill's going up as well. In a nutshell, you put that all together, earnings have gone up but not to the extent hoped for.

Jessica Amir: Moving overseas now, Jen, what can you tell us about US infrastructure?

Jennifer Lam: Similar story to Australia, so a lot of bullishness, expectation, but not yet fulfilled. Since the Obama administration enacted the FAST Act in 2015, that was for infrastructure funding, there's been a lot of hope we'll see a wave of new infrastructure projects enter the market for new bridges, new roads. However, again, that has not come to fruition yet and volumes have been slower than expected. One suspected driver of this is that government, at the government level, they don't have the resources. They don't have the experience of delivering these big projects, hence we are seeing delays at the pace of which these projects enter the market. Hopefully it's a question of when, not if, but patience is required.

Jessica Amir: So, Jen, there's a lot to consider, but how do you deal with everything when forecasting companies' earnings?

Jennifer Lam: My general starting point is to be conservative with my assumptions, and it's a case of then going out there, talking to industry participants, like your customers and your competitors, to get their on-the-ground feel of what's going on and what the outlook is, and then using that feedback to check my assumptions to see if it's... well, does it make sense? Very shortly I'll be going to the US for such a due diligence trip, so I'll be seeing home builders, industry bodies, construction material suppliers, and also big box retailers. The idea is to get the feedback of what they're seeing, what they expect, and then use that information to confirm my forecast or otherwise update them.

Jessica Amir: Well, we look forward to hearing your results. Jennifer Lam, thank you so much.

Jennifer Lam: Thanks for having me.

Jessica Amir: And thank you for watching.