Gloomy Messages For BLD, RIC.

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Gloomy Messages For BLD, RIC
October 30th 2007 - Australasian Investment Review – (AIR)

Shareholders in building products group, Boral and stockfeeds producer, Ridley Corporation took away gloomy messages from yesterday’s AGMs which neatly sum up some of the major negatives confronting quite a few companies, and more if you extend their messages a little wider.

At their narrowest the messages were more downgrades in earnings for the home building side of Boral (in the US), the dollar is playing havoc with overseas earnings from both companies, and the drought is making life very, very tough for a lot more people.

In a wider vein, its interest rates and inflation and the way they are combining: the drought is pushing up the cost of food across the board, and so is the rising cost of energy. Besides clipping earnings, the higher dollar isn’t having that much of an impact on cost pressures.

It is curbing price rises for imported consumer products, oil and other goods (capital goods for example) but much of domestic price pressure is domestic, internally generated through higher rent and building costs, higher government and utility charges and the rising scarcity of water.

Boral told shareholders that first half earnings and for the full year, could be 15%, if the Australian dollar remains strong and the US housing market is softer than expected (which it looks like being). The cost from the higher dollar could be as much as $44 million off earnings.

The company said its Australian business was ahead of expectations in the first quarter of 2007/08, but that the US operations were not going as well.

CEO, Rod Pearse, said Boral was expecting US housing starts for fiscal 2008 to be as low as 1.1 million, compared to recent, revised market forecasts of 1.25 million starts.

“Whilst there is considerable uncertainty we anticipate that US housing starts could fall to 1.1 million in fiscal 2008, which is 30% under prior year and 40% below the level of underlying demand,” he told shareholders.

“If this occurs and if the Australian/US dollar exchange rate remains at around 90 US cents for the remainder of the year, Boral’s profit after tax in the first half and the full year will be around 15% below last year,” he said.

Mr Pearse said that construction materials profits in Australia in the September quarter were above the prior year as it was in fiscal 2007, and “We expect this trend to continue in fiscal 2008. (That’s the resources and infrastructure booms making up for the lacklustre home building sector.)

“Concrete and quarry prices have lifted well year-on-year as the April 2007 price increases flow through,” Mr Pearse said: “Cement price increases of $8/tonne have recently been announced in Queensland as import parity prices have strengthened as a result of stronger cement prices out of China and higher freight rates.”

Mr Pearse also said that despite weakness in some markets, the performance of the Australian building products businesses in the September quarter was ahead of expectations.

“We expect that building products profits for the full year will be broadly flat with the prior year,” he said.

“We expect continued growth and competitive market conditions in Asia for the remainder of fiscal 2008.

But with the RBA expected to lift interest rates next month and possibly again in the first quarter of 2008, that confidence about the local building products business might take a hit.

Boral shares fell 5c to $6.77 on the gloomy outlook. None of the froth and bubble from yesterday’s resources surge touched the stock.

At least Ridley shareholders saw a half a cent rise in their depressed share price to $1.355, despite a less than happy outlook.

The Ridley annual meeting was told that the outlook for farmers around the country was grim because of the continued drought and the absence of rain for the second consecutive spring.

Ridley also said it was hard for the company to give specific earnings guidance because of the difficult rural conditions.

Chairman, John Keniry, told shareholders at the AGM in Sydney “The outlook is now grim for both irrigators and dryland farmers in almost all parts of the country, and this is flowing through to the intensive livestock sectors which we service.

“High feed prices, grain shortages and the complications, and risks, of having to import feed grain, seemingly will be a fact of life for us for the foreseeable future.”

Nonetheless, for the first quarter of the current year, he said Ridley’s Australian businesses in aggregate were slightly ahead of last year.

But its ability to keep up that performance depends upon near-term rainfall, trends in world grain prices and the Australian dollar’s strength against the US dollar.

Chief executive, Matthew Bickford-Smith, said Ridley’s net earnings in the first quarter of this year were a little over 10% ahead of the first quarter of 2006.

“However, it is difficult to give specific guidance for the full year because of the conditions facing our Australian feed business, Ridley AgriProducts,” he said.

“A second year of severe drought in Australia, record high grain prices and poor market conditions for some of our key customers, notably in the pork sector, mean that earnings visibility for this business is low.”

He said the company’s Cheetham salt business had a very positive start to the year while the North American feed business, Ridley Inc, was performing a little better than last year.

Dr Keniry said a further concern was the way biofuel subsidies, particularly in the US and Europe, were inflating grain and oilseed prices on world markets.

He said this, combined with increased demand for food from fast-growing Asian economies and some regional drought-induced supply constraints, had caused extreme volatility in grain prices, which was now beginning to flow through to consumer prices.

Ridley booked an annual profit of $22.7 million in 2006/07, down 18% on the 2006 year.

Figures released last Friday by the NSW Government showed that the state’s 2008 wheat harvest would be lower than last year’s drought damaged crop.

Wheat production this harvest may be 1.67 million tonnes, compared with the 2.26 million tonnes estimated on in late September according to the NSW Department of Primary Industries.

The 2007 crop year harvest was 2.05 million tonnes.

“Seasonal conditions have continued to deteriorate across the state from mid-September through October with most regions experiencing little or no rain,” the department said. Although some areas got good rains at the end of last week and over the weekend.

Copyright Australasian Investment Review.
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