Criterion: Overlooked building stocks are poised for a housing recovery

Recent takeovers have added to the rarity value of ASX-listed building material plays
Having cut costs, the overlooked Capral is well-placed for a housing uptick
Bell Potter says there’s latent value in Brickworks’ property assets

With large-cap ASX building material stocks falling away by the lorry load, investors are searching for other niche suppliers exposed to a likely rebound in housing activity.

This year, CSR, Boral and AdBri have all departed the bourse by way of takeovers, leaving Brickworks (ASX:BKW), the US-focused James Hardie (ASX:JHX) and the out-of-sorts trans-Tasman Fletcher Building (ASX:FBU).

In the small caps space the $166 million market cap aluminium supplier and distributor Capral (ASX:CAA) hasn’t felt the love, mainly because of excessive debt and an investment in its Bremer Park facility in southern Queensland that left it exposed to the housing downturn.

But after a 2019 restructuring Capral is left with no debt, $67 million of cash and a plenty of handy tax losses.

Capral CEO Tony Dragicevich says investors are waking up to the company’s status as the nation’s biggest aluminium extrusion roll and sheet plate manufacturer and distributor.

“Every dog has its day,” he quips.

Capral takes raw aluminium billet from the smelters and produces about 60,000 tonnes of aluminium extrusions a year – material that is then used by customers for products such as windows, doors, boat hulls and truck bodies.

About half is sold through Capral’s own network of 22 distribution centres, with the rest sold directly mill-direct to large industrial users.

While industrial customers provide a reliable base, residential construction remains the profitability swing factor, accounting for 40% of volume.

Housing starts have been subdued for two years, but Dragicevich expects the worm to turn once interest rates fall.

Bremer Park was losing $8 million a year at a previous low point in the housing cycle, but post-restructuring the plant is making $3-4 million a year.

“We are probably seen as having a higher risk profile than the larger, more diversified players,” he says.

“The market wants to see how our performance goes through the housing cycle and whether we hit our targets our not.”

Capral paid dividends for five years in a row, but with franking credits exhausted the company has turned to an ongoing share buyback to return capital.

With a similar market cap, Big River Industries (ASX:BRI) provides triple veneer plywood and form ply. The company has 13 building trade centres, providing much-needed competition to Bunnings Trade.

About two-thirds of Big River’s revenue – $414 million in the 2023-24 year – derived from housing activity on both sides of the Tasman. Last year the company paid a dividend equating to an 8% yield.

For those chary of the housing market, the $320 million Acrow Formwork & Construction Services (ASX:ACF) has shifted its focus from the residential to engineered formwork and scaffolding for mega infrastructure projects.

Marquee clients include the Sydney Metro West project, Melbourne’s West Gate Tunnel and Metro Tunnel and the Snowy Hydro 2.0

Brickworks is interesting because as well as making – er – bricks, the company has industrial property joint ventures with Goodman Group (ASX:GMG), covering third party assets and Brickworks own manufacturing sites.

Bell Potter values Brickworks share of the properties at just under $2.15 billion, compared with $1.34 billion for its local and US building material operations.

The firm believes the market has underestimated Brickworks potential to glean more value from the “under rented” properties by boosting rents when interest rates subside.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decision.