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.

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.

Want to trade Adbri: long or short?

Create an IG trading account or log in to your existing account to get started now.

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

Please see important Research Disclaimer.

Seize a share opportunity today

Go long or short on thousands of international stocks.

  • Increase your market exposure with leverage
  • Get spreads from just 0.1% on major global shares
  • Trade CFDs straight into order books with direct market access

Live prices on most popular markets

  • Forex
  • Shares
  • Indices
liveprices.javascriptrequired
liveprices.javascriptrequired

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

liveprices.javascriptrequired

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.

The Momentum Report

Get the week’s momentum report sent directly to your inbox every Monday for FREE. The Week Ahead gives you a full calendar of upcoming key events to monitor in the coming week, as well as commentary and insight from our expert analysts on the major indices to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.