Adelaide Brighton. Overcoming headwinds A$5.45 AUSTRALIA. Event. Impact. Earnings and target price revision. Price catalyst. Action and recommendation

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1 AUSTRALIA ABC AU Price (at 09:22, 23 Feb 2017 GMT) Outperform A$5.45 Valuation A$ DCF (WACC 7.8%, beta 1.2, ERP 5.0%, RFR 3.3%, TGR 2.0%) 12-month target A$ month TSR % +2 Volatility Index Low GICS sector Materials Market cap A$m 3, day avg turnover A$m 8.1 Number shares on issue m Investment fundamentals Year end 31 Dec 2016A 2017E 2018E 2019E Revenue m 1, , , ,653.6 EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x ABC AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, February 2017 (all figures in AUD unless noted) 24 February 2017 Macquarie Securities (Australia) Limited Overcoming headwinds Event ABC reported FY16 results that were below our expectations due to transitory energy issues in South Australia. Positive outlook comments centred on infrastructure-driven market momentum. Impact P&L outcomes missed. Revenue of $1,396m (MQe: $1,440m, pcp: $1,413m), Underlying EBIT of $266m (MQe: $282.4m, pcp: $300.3m) and Adjusted NPAT of $186m (MQe: $196m, pcp: $207.9m) were below expectations. Property PBT of $8.4m was down from $45.0m in the pcp. Ex- Property EBIT of $257.7m grew 1% from $255.3m in the pcp. Disappointing in the core. CLC&A revenue of $1,499m (MQe: $1,512m) and EBIT of $259.3m (MQe: $280.6m) missed due to cement and clinker volumes declining (notably in WA & NT), combined with a significant energy cost increase in SA ($13m) and higher import costs ($7m). Partners come through. The performance of the associate portfolio was good, with ICL in particular, posting a solid 33% improvement in contribution as cost recovery improved further. JVs' contribution of $30.9m was ahead of our $24.2m expectation. Expanding the network. ABC has agreed to purchase Central Pre-Mix, an integrated concrete and aggregate operation serving the metropolitan Melbourne market for a purchase price of $61m, completing next month. At 7x EBITDA, the deal is expected to be accretive pre transaction costs in FY17. Cash flow firm. Operating cash flow of $248.4m was solid up 8% YoY, improving on an ex-property basis. Working capital movement was minimal. Outlook remains positive. No explicit guidance was given for FY17, but higher volumes, price growth (and better mix) and an expectation that energy issues do not recur suggest a solid recovery is in store. We expect 15% and 11% EPS growth in FY17 and FY18. Earnings and target price revision We have adjusted FY17 and FY18 EPS by 3.0% and 1% to reflect better volume and pricing expectations in key end markets. Price catalyst 12-month price target: A$6.30 based on a Sum of Parts methodology. Catalyst: Building industry data Action and recommendation Maintain Outperform. The investment case is underscored by rising infrastructure demand despite transitory operational issues. We continue to see infrastructure activity underpinning volume and price, while operational performance should improve too. The stock has traded down to in line with medium term averages, but is well off recent relative valuations, and offers value. Please refer to page 7 for important disclosures and analyst certification, or on our website

2 Analysis Fig 1 1HFY17 results review The good The not so good The interesting Brighter outlook. While this result was marred by a number of factors, many of which were out of management control, the outlook for better volumes, prices and further improved efficiencies underpin the prospect for a better FY17. Solid cash flow. Cash performance was solid, with operating cash flow post capex up 9% YoY. This excludes the negative YoY impacts of lower property realisations. Working capital absorption was only $4.9m in the year ($29.2m in pcp). JV s come good. ICL, Sunstate, Aalborg and Mawsons all delivered strongly improved results, with JV s in aggregate growing by 44% YoY to $30.9m. Special, albeit a light one. ABC declared a special dividend of $0.04 per share. While below our $0.06ps expectations, the acquisition of Central would likely have impacted quantum. Balance sheet solid. Gearing post the acquisition is expected to remain well within managements target range of 20-30%. We expect debt to be paid off quickly by strong cash generation. Source: Macquarie Research, February 2017 Operational miss. Cement, Lime, Concrete and Aggregates core EBIT of $259.3m was materially weaker than our $280.6m forecast. Weaker WA demand and a large $13m impact from energy-related issues, $9m of which is due to supply disruptions, undermined the result. Increased import costs of $7m added to the headwinds. Most of these have been described as one-off, or in the case of fx, are not expected to recur in FY17. Missed guidance. The group s reported $186.3m Adjusted NPAT missed its guided $ m range. The delta between guidance and actual was driven by the $9m energy hit. Buys in Melbourne. The group announced the acquisition of a concrete and aggregate business in Melbourne, Central, with exposure to the metropolitan Melbourne market. At 7x EBITDA, it seems a reasonable deal that will be earnings neutral after transaction costs of $3m in FY17. The deal adds ~4% and 2.5% to the revenue and EBITDA base, respectively. Lime benefiting from lower gas. While East coast energy costs are up significantly, ABC s west coast lime business benefitted from an $8m reduction in gas costs. Adjusting the asset base. ABC has decided to rationalise cement manufacturing in Angaston in South Australia. This will deliver $2.6m in annualised savings once fully implemented. KEY CHART: Following a soft FY16, growth is expected to rebound as operational challenges abate. However, more fundamentally, market conditions are expected to support volume and pricing outcomes. In terms of pricing, we expect average price growth of 1.5% in FY17 and 4% in FY18. Fig 2 Acceleration in growth expected in EBIT excluding property realisations % YoY 25% 20% 15% 10% 5% 0% -5% 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17e 2H17e 1H18e 2H18e Source: Company data, Macquarie Research, February February

3 Sep-2006 Feb-2007 Jul-2007 Dec-2007 May-2008 Oct-2008 Mar-2009 Aug-2009 Jan-2010 Jun-2010 Nov-2010 Apr-2011 Sep-2011 Feb-2012 Jul-2012 Dec-2012 May-2013 Oct-2013 Mar-2014 Aug-2014 Jan-2015 Jun-2015 Nov-2015 Apr-2016 Sep-2016 Sep-2006 Feb-2007 Jul-2007 Dec-2007 May-2008 Oct-2008 Mar-2009 Aug-2009 Jan-2010 Jun-2010 Nov-2010 Apr-2011 Sep-2011 Feb-2012 Jul-2012 Dec-2012 May-2013 Oct-2013 Mar-2014 Aug-2014 Jan-2015 Jun-2015 Nov-2015 Apr-2016 Sep-2016 Macquarie Wealth Management Investment thesis Infrastructure thematic. A significant amount of infrastructure work is beginning to move from initial planning stages to construction, with the majority of this work in roads, highways, subdivisions and bridges (RHS&B) which is materials intensive. Fig 3 A significant increase in project work in execution A$ bn Mar 14 Jan 15 Apr 15 Jul 15 Oct 15 Dec 15 Apr 16 Nov 16 Tender Committed Under Construction Completed Postponed Approvals Planning Feasibility Source: NICS, Macquarie Research, February 2017 ABC is exposed to infrastructure in NSW and VIC (21% of revenue each, across all sectors), but is best positioned in SA (14% of revenue), where it has a strong supply position and enjoys far superior profitability. Second-derivative benefits from NSW, QLD and VIC are expected to come through capacity tightening in the broader supply network. In our view, this will lead to a better pricing environment, as evidenced by the increased frequency of pricing announcements across the industry, and solid volume benefits. Fig 4 ABC to benefit from network tightening in NSW.. Fig 5 but is the best positioned in SA $b Roads, highways and subdivisions - NSW (Value of work yet to be done) Roads, highways and subdivisions - SA (Value of work yet to be done) Source: ABS, Macquarie Research, February 2017 Source: ABS, Macquarie Research, February 2017 ABC is trading at its long-term mean. In the context of a supportive market environment, a good thematic underpin from infrastructure and accelerating earnings growth, we think presents an opportune entry point.. Stripping away the impacts of property realisations, we expect EBIT growth to accelerate through FY17 and into FY18 to above-average levels as noted in Figure 2 above. 24 February

4 Fig 6 ABC PER relative to ASX 200 Industrials Fig 7 Absolute PER versus ASX 200 Industrials Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16 ABC-AU Rolling 36M Mean Mean + 1 Stdev Mean - 1 Stdev Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16 ABC-AU ASX 200 Industrials Source: Factset, Macquarie Research, February 2017 Source: Factset, Macquarie Research, February 2017 We raise our target price from $5.95 to $6.30, using a combination of valuation methods SOTP, DCF and PER. Result analysis Fig 8 Comparison of results A$m 2H15 1H16 2H16 v pcp FY16e FY17e FY18e Revenue Cement, Concrete and Lime % 1, , ,795.0 Concrete Products % Property % All Other Income (146.8) (150.7) (176.0) 19.9% (326.7) (362.7) (362.7) Total Revenue % 1, , ,586.6 EBITDA % EBITDA Margin 30.3% 22.0% 27.3% 24.7% 26.1% 27.0% Depreciation & Amortisation (39.9) (40.1) (38.3) -4.0% (78.4) (80.8) (82.5) EBIT Cement, Concrete and Lime % Joint Ventures % Concrete Products % All Other Segments (15.6) (17.5) (15.6) 0.0% (33.1) (32.9) (33.6) Total EBIT (Underlying) % Property (included in CL&C) Total EBIT (Ex-Property) % Group Underlying EBIT Margin 24.9% 16.2% 21.9% 19.1% 20.7% 21.8% Net Interest Revenue / (Expense) (6.5) (6.1) (5.4) -16.9% (11.5) (15.1) (15.3) Underlying Profit Before Tax % Tax Expense (50.4) (27.6) (40.8) -19.0% (68.4) (81.3) (92.5) Underlying NPAT % Significant Items (Post Tax) (0.9) (2.9) - Reported NPAT % Dividends Per Share (Cents) % Net Debt (A$m) % Net Debt/Equity (%) 24.6% 29.1% 23.6% -3.9% 23.6% 25.4% 23.2% Source: Company data, Macquarie Research, February February

5 Fig 9 ABC estimate summary Profit and Loss FY16 FY17e FY18e FY19e Per Share Data (c) FY16 FY17e FY18e FY19e Revenue EPS Shares (m) Cement, Lime, Concrete & Aggregates 1, , , ,789.9 Normalised EPS Masonry Grow th Inc. Property (%) -11.1% 15.0% 11.1% 7.8% All other segments Dividends (inc. Specials) Other (257.6) (287.8) (287.8) (287.8) Dividends Yield (%) Operating revenue 1, , , ,653.6 Payout Ratio (%) 98.1% 88.3% 71.3% 71.2% Grow th -1% 7% 6% 4% Net Tangible Assets ($) Operating costs (1,052.0) (1,105.9) (1,158.3) (1,200.1) EBITDA Valuation Metric Average Target Depreciation & Amortisation DCF valuation $6.40 EBIT SOTP valuation $6.28 $6.31 Net Interest expense (11.5) (15.1) (15.3) (13.1) PER valuation $6.25 Net Profit Before Tax Taxation (68.4) (81.3) (92.5) (99.7) Multiples (x) FY16 FY17e FY18e FY19e NPAT (Adjusted) Enterprise Value (A$m) 3, , , ,791.5 Minorities EV / EBITDA EV / EBIT NPAT attributable to members (Adjusted) Normalised P/E (x) Cashflow statement FY16 FY17e FY18e FY19e Operating Metrics FY16 FY17e FY18e FY19e EBITDA Margin 24.7% 26.1% 27.0% 27.4% Operating cashflows EBIT Margin 19.1% 20.7% 21.8% 22.3% EBITDA Net Profit Margin 13.3% 14.3% 15.0% 15.5% Change in Working Capital Return on Assets 10.2% 11.3% 12.0% 12.5% Net interest Return on Equity 15.3% 17.2% 18.4% 19.0% Income tax paid Net Debt (m) Other Gearing (ND / Equity) 23.6% 25.4% 23.2% 17.0% Net Operating cashflow Net Debt / EBITDA (x) EBIT Interest Cover (x) Cashflows from investing activities Effective Tax Rate 26.9% 27.5% 28.0% 28.0% Capex (86.5) (90.0) (90.0) (90.0) Debt capacity at 1.5 ND / EBITDA Disposals Debt capacity at 2.0 ND / EBITDA Acquistions - (64.0) - - Divestments Segment Detail FY16 FY17e FY18e FY19e Loans to related parties Revenue Other (2.0) Cement, Lime, Concrete & Aggregates Net cashflow from investing activities (64.7) (154.0) (90.0) (90.0) Masonry All other segments Cashflows from financing activities Other Proceeds from issues of shares and other equity , , , ,653.6 Proceeds from borrow ings EBIT (A$m) Repayment of borrow ings Cement, Lime, Concrete & Aggregates Dividends paid (net of DRP) Joint Ventures Other financing items Masonry Net cashflow from financing activities Corporate (33.1) (32.9) (33.6) (34.3) Net increase (decrease) in cash held Property (included in CLC&A) Cash at beginning of financial year EBIT margin (%) Effects of exchange rate changes Cement, Lime, Concrete & Aggregates 17.1% 18.4% 19.5% 20.1% Cash at the end of the financial year Masonry 7.6% 8.1% 7.3% 7.1% Source: Company data, Macquarie Research, February February

6 Macquarie Quant View The quant model currently holds a reasonably positive view on Adelaide Brighton. The strongest style exposure is Quality, indicating this stock is likely to have a superior and more stable underlying earnings stream. The weakest style exposure is Earnings Momentum, indicating this stock has received earnings downgrades and is not well liked by sell side analysts. 390/1547 Global rank in Materials % of BUY recommendations 14% (1/7) Number of Price Target downgrades 0 Number of Price Target upgrades 1 Fundamentals Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Materials) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. BlueScope Steel 2.2 BlueScope Steel CSR 1.7 CSR DuluxGroup James Hardie Industries Brickworks DuluxGroup James Hardie Industries Brickworks % -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. BlueScope Steel CSR DuluxGroup BlueScope Steel CSR DuluxGroup James Hardie Industries -0.5 James Hardie Industries Brickworks Brickworks % -50% 0% 50% 100% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Price to Cash NTM Price to Earnings LTM EV/EBITDA FY0 Price to Book LTM Momentum 3 Month 3M Price Target Revisions Momentum 6 Month Momentum 12 Month -28% -21% -23% -23% Negatives Positives 28% 26% 25% 29% -30% -20% -10% 0% 10% 20% 30% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score Percentile relative to sector(/1547) Percentile relative to market(/422) Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 24 February

7 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 2016 AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients) Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients) Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients) ABC AU vs ASX 100, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, February month target price methodology ABC AU: A$6.30 based on a Sum of Parts methodology Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 01-Feb-2017 ABC AU Outperform A$ Sep-2016 ABC AU Outperform A$ Sep-2016 ABC AU Neutral A$ Feb-2016 ABC AU Neutral A$ Oct-2015 ABC AU Neutral A$ Aug-2015 ABC AU Neutral A$ Jul-2015 ABC AU Neutral A$ Feb-2015 ABC AU Neutral A$ Nov-2014 ABC AU Neutral A$ Aug-2014 ABC AU Neutral A$ May-2014 ABC AU Neutral A$ Mar-2014 ABC AU Outperform A$ Feb-2014 ABC AU Outperform A$4.25 Target price risk disclosures: ABC AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views 24 February

8 This publication was disseminated on 23 February 2017 at 15:58 UTC. Macquarie Wealth Management expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN , AFSL , a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN AFSL ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Apart from Macquarie Bank Limited ABN (MBL), any MGL subsidiary noted in this research,, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at Macquarie Group 24 February