The big four -- Boral Ltd, CSR Ltd, James Hardie Ltd and Rinker Group Ltd -- all rode the highs of Australia's housing boom with record levels of activity and substantial profit increases. But 2004 is shaping up to be a tougher year, with a downturn in residential building activity expected in both the local and the US markets, and analysts reckon the end of the good times is in sight. "This year they'll hold up and probably do quite well," Commonwealth Securities analyst Graeme Woodbridge said. "I think it's the following financial year where the expected downturn in residential construction will start to pinch."
Analysts reckon one of the major hurdles facing building construction companies in 2004 is the impending residential market downturn. For now, companies themselves have forecast strong activity levels for the coming year. Boral managing director Rod Pearse told shareholders at the group's annual general meeting back in October that "order books remain strong" in Australia and underlying activity in the US was also strong. James Hardie said at the release of its half-year results in November that it expected housing activity levels in North America to remain steady, while in Australia, commercial construction and renovations were expected to remain strong.
Like Australia, the US has been experiencing a housing boom, and analysts expect that activity in the US will pull back to more sustainable levels. Goldman Sachs JB Were said in a research note that US residential activity was tracking at a "surprisingly robust pace" but this meant investors were increasingly concerned that a downturn was imminent.
For Rinker and James Hardie especially, which generate 80 per cent and 75 per cent of their earnings in the US, that is a major cause for concern.
Of the four major firms, CSR and Boral are most exposed to the domestic housing market. "We've fairly high growth in residential construction activity and it's fairly cyclical -- so the extent to which it comes off in this year and next, that's the big driver," Mr Woodbridge said. He also noted that rising domestic interest rates were an added consideration this year in the housing activity story.
The saving grace for Boral could be its takeover bid for cement maker Adelaide Brighton. In December, Boral launched an off-market bid for Adelaide Brighton to boost its presence in the cement and lime sectors. James Hardie's short-term outlook is not quite so bright, with a cloud of controversy surrounding it over asbestos compensation claims. James Hardie shares dropped significantly late last year after the foundation it had set up to cover asbestos-related claims said it would have insufficient funds to cover future claims.
