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Adbri share price: implications of the Alcoa contract loss

We examine the details behind Adbri’s recently announced supply contract loss; as well as how three top investment banks reacted.

Adbri Source: Bloomberg

Adelaide Brighton (Adbri) share price drops on key contract loss

Adbri Limited (ABC) – previously trading under the the name Adelaide Brighton Limited – last Friday announced that Alcoa Australia would not be renewing its current lime supply contract with the firm.

That supply contract – expiring 30 June 2021 – contributes ~approximately $70 million in annual revenues, driving around 40% of Adbri’s lime segment sales, according to Citi.

In a statement released to the market, the company said it 'will promptly evaluate and take necessary mitigating actions’ to the loss of the supply contract. Even so, it was noted that the financial impact of the contract loss could not be quantified at present.

The market, performing its own back-of-the-envelope calculations, bid the stock down aggressively on Friday – with the Adbri share price closing out the session down ~25%, to $2.350 per share.

The company's Chief Executive, Nick Miller described the non-renewal as disappointing given the long supply relationship held with Alcoa. Even so, Mr Miller stressed that 'We will work quickly to mitigate the impact on local jobs supporting our lime business and we remain committed to supplying our WA resources sector customers.'

On Monday the stock continued to trend lower, down ~5.5% to $2.22 per share as of 2:06PM (AEST).

The materiality of Alcoa

Framed against the earnings significant of Adbri’s lime segment, the pronounced share price decline witnessed during the last two sessions is hardly surprising.

Indeed, while the lime segment’s contribution to ABC’s top-line is comparably small, its earning contribution is anything but, estimated at between 20-30% of Group earnings (EBIT), according to analysts from Citi.

‘The potential loss of earnings is significant and one response may be to reduce pricing and try to retain Alcoa, which may have a smaller earnings impact than losing the contract outright,’ Citi analysts mused.

Citi currently has a Neutral rating and a price target of $3.00 per share on the stock.

By comparison, analysts from Morgan Stanley (MS), though recognising the material impact the loss of the Alcoa contract would have on Adbri’s FY21 earnings, reiterated their Overweight rating and $3.70 price target on the stock.

‘We still see ABC as well positioned to benefit from a construction related stimulus in the short to medium term, but today’s announcement does detract from ABC’s highest quality business,’ MS analysts said.

Macquarie analysts were less constructive than MS and Citi, noting that ABC looks expensive at current price levels. In response to Friday’s announcement, they reiterated their Underperform rating and cut their price target to $1.85 per share.

‘The contract loss risks affecting the competitive ability of the remainder of the lime business, while potentially opening opportunity to importers who would gain scale from the win. Price and cost could be at stake,’ Macquarie analysts warned.

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