An Industry Having a ‘Chumbawamba’ Moment

Takeover activity is part & parcel of listed equity markets. From time to time, the level of activity can be subdued but in a short space of time, if equity market valuations fall significantly, activity can change from being relatively low to something more akin to a ‘takeover frenzy’. We believe we witnessed one of these periods between December 2023 to May 2024 where we saw at least 14 non-mining micro/small/mid cap companies get acquired (Altium, Link Administration, Volpara, PSC Insurance to name a few). Once again we believe we are witnessing one of those periods where the sands are shifting and a significant number of businesses are exiting the public markets. To highlight this point, below is a select list of non-mining and energy takeover deals in 2025 alone; as you can see, there has been a burst of activity in the last few months.

Recent Takeover Activity Analysis

From the above table, there are two main insights that stand out to us:

1. The list of acquirers contains buyers who are generally strategic, long-term holders (for the most part).

Equity markets can at times be driven by fundamentals but at other times take a backward seat to overwhelming irrational investor behaviours of hubris and over-confidence. It is when these behaviours creep into equity markets, valuations can become significantly overpriced or under-priced, the latter of which can be a major boon for acquirers with deep pockets and a long-term view.

As can be seen from the list above, a lot of these companies have been in the very small end of the market, sub $1bn in size. It is in this area of the market, where those outside of certain indices arguably are the most overlooked companies by equity investors.

A takeover occurrence of course provides equity holders with a short-term boost to their current holding value as well as a liquidity event. Conversely, a strategic acquirer may be purchasing the business at a price which is materially below 1–2-year share price highs. For a small takeover share price premium, the long-term value transfer to the acquirer occurs, while listed equity markets lose another good quality company as a constituent.

2. The building materials sector has been in the spotlight.

The building materials sector has also seen heightened takeover activity throughout the earlier parts of 2024 and also more recently. See below table for further details on these transactions.

• Adbri Ltd (ASX: ABC): CRH Plc (CRH: NYSE) the Irish based international building materials conglomerate with ~US$36bn of revenue.
• CSR Ltd (ASX: CSR): Saint-Gobain (SGO: EUR) the French multinational materials company with operations in > 75 countries employing ~160k people and generates ~AUD$80bn in sales.
• Boral Ltd (ASX: BLD): Seven Group Ltd (ASX: SVW), the domestic family conglomerate which historically has a strong track record of success within the industrials/building sector, as can be seen through the 10-year comparison below outlined in a 2024 market release.

• AVJennings Ltd (ASX: AVJ): Proprium Capital Partners are a US based real-estate specialist investment firm which has a significant investment in Australia through ownership of major residential developer Avid Property Group (which also owns the previously listed Villaworld).
• Brickworks Ltd (ASX: BKW): Has announced a ~$14bn merger agreement with Washington H. Soul Pattinson and Co. Whilst this entity will remain listed on the ASX, similar to Boral with ASX: SGH, it will no longer be a ‘pure play’ building materials company.

We would argue that all of the abovementioned acquirers have significant experience within this sector and are substantial in size. Our hypothesis is that sector short-term weaknesses that have persisted for the past ~24 months are masking sector medium to long-term strengths, which gives strategic acquirers the impetus when the cycle is at, or close to the ‘bottom’.

It’s ‘Chumbawamba Time’

The British punk band Chumbawamba released a 90’s hit song called ‘Tubthumping’, in which the lyrics of its iconic and repetitive chorus are as follows:

“I get knocked down, but I get up again

You are never gonna keep me down

I get knocked down, but I get up again

You are never gonna keep me down”

Those lyrics resonate loudly with the current situation facing the Australian building materials sector. After a COVID stimulus led artificial boost, particularly the Australian Federal Government’s Homebuilder policy, the past 24 months has seen significant pressures impacting a wide array of industry players, and in the case of many fixed price builders, to the point of collapse. Without a doubt, the sector has been knocked down.

The building & construction industry (including building materials and homebuilders) is widely regarded to be cyclical in nature. This blanket statement broadly covers everyone however within such a large industry there are naturally different segments which face cyclicality at different times as demand and volatility variables in areas such as residential (detached, multi-residential and alterations & additions), commercial, civil and infrastructure. Each segment can be dissected further by geography and the size of market participants. Different segments and sub-segments can experience opposing headwinds/tailwinds at the same time.

Furthermore, macroeconomic conditions can obviously have an outsized impact, particularly relating to interest rates. While interest rates will have an impact on demand for building & construction, we believe there are other factors which drive industry health (or lack thereof) and influence the market conditions. These include:

Headwind #1: Construction Cost Inflation

CBRE Research published the ‘Apartment Vacancy and Rent Outlook’ report in March 2024 which assesses the relative increases over time of inflation, land values, construction costs and apartment values. On a 25-year view, it is only really the land values that have seen substantial growth during that period of time; the other inputs have increased incrementally. Construction cost increases have tracked around the same rate as inflation. However, when looking at the past 5 years we can see the inflationary impact; whereby the historical correlation between the price of an apartment and the cost of building that apartment has broken down.

Apartment Values Vs Construction Costs – 2018-2026[1]

Adding further context to this, the prices for building materials, particularly timber and steel have returned to normal post a period of irregular price elevation. From this data we believe the COVID policy stimulus programs and raw material supply chain shortages have effectively ‘washed through the system’.

Relative Price Movement of Construction Input Costs – Producer Price Index [2]

Headwind #2: Labour Shortages

Certainly not alone, the construction industry was hit very hard by labour shortages. Originally triggered by skilled and specialised labour shortages during COVID – driven by reduced immigration and domestic skill movement and further exacerbated, with a national unemployment rate that reached 50-year lows (~3.5%), sourcing labour from other industries hasn’t been able to occur. According to the Federal Government department, Jobs and Skills Australia, in late 2023, 36% of occupations were assessed to be experiencing labour shortages.[3]

Fast forward to 2025 and the National Housing Accord target of 1.2m homes by mid-2029 currently has a shortage of ~130k workers to deliver upon this, which would imply a required increase of ~12% in workforce size. This is before accounting for the fact that there is a generational transition occurring within the industry over the coming years. In April 2025, the CEO of Master Builders Australia, a key industry body, said:

“Over the next five years, the industry will require more than 500,000 new entrants to replace those retiring and to expand its workforce sufficiently to meet future housing and infrastructure needs…There is a real problem where too many kids are being encouraged into university over vocational education, and of those that do start a trade, around 50 per cent don’t complete their training. That’s not good enough—not for industry, not for young people, and certainly not for Australia’s housing future and economy.”[4]

Whilst consensus views suggest the labour shortages have eased from their highs (the current unemployment rate is ~4.1%), there are also many divergent opinions on how to solve the structural skills shortage issues experienced throughout the domestic economy and it is a front of mind topic for political parties. An example of this being front of mind is the Federal Government’s Migration Strategy which contains 8 key actions with action #1 being ‘Targeting temporary skilled migration to address skills needs and promote worker mobility’[5]. This includes a 4-year temporary work visa for skills in demand that will provide a pathway to permanent residence. This issue does not have a quick fix, but at least the issue is starting to at least be recognised.

Headwind #3: Regulatory ‘Red Tape’

The impact which increased regulation can have upon any given sector appears to grow and grow over time. A heightened regulatory process/framework magnifies delays, creates an increased cost burden on projects and brings potential restrictions on productivity. Regulation is obviously necessary to safeguard and manage risk, however it’s a delicate balance to find the right level of regulation.

In an op-ed, Business Council of Australia CEO Bran Black described the some of the regulations facing homebuilders as “tortuous” …

“Businesses know a big part of keeping grand plans in planning stage, and going nowhere fast, is regulation. A patchwork of tortuous regulation across the nation is contributing to making us unproductive and slowing housing developments.”[6]

Further to this, the Productivity Commission recently released a 2025 report titled ‘Housing Construction Productivity: Can we fix it?’ which contained an alarming statistic - the number of dwellings completed per hour worked by housing construction workers has declined by 53% since 1995. Put simply, on a comparative basis, half as many homes are being built compared to 30 years ago.[7]

Housing Construction Productivity[8]

There are signs however of a global reduction in bureaucratic inefficiencies which are or are perceived to be in place – look no further than the Trump/Musk DOGE campaign in the USA. The groundswell behind regulatory reform in the domestic building industry has also taken hold over the past 18 months, most notably aimed at freeing up bottlenecks for housing supply. In March 2024, the Building Ministers from all jurisdictions agreed to push ahead with a new edition of the National Construction Code (Australia's primary set of technical design and construction provisions for buildings) with a major focus being on red tape removal. Fun fact – the edition of the Code being replaced had grown to >2000 pages in length!

Furthermore, many of the respective state governments have implemented programs to reduce unnecessary regulation. For example, in 2024 both South Australia and Western Australia removed technical definitions as well as streamlining planning approvals with the ability to bypass local councils in certain scenarios.[9] [10]

Will this result in improvements in the level of activity within the building and construction industry? Logic would dictate that it does seem reasonable to say that more appropriate regulations across different jurisdictions cannot make things any worse than they already are.

“I Get Knocked Down, But I Get Up Again”

The current macroeconomic conditions coupled with sector specific headwinds are creating a perfect storm. According to ASIC’s insolvency data release from 2 June 2025, there have been ~12,000 companies enter administration thus far in FY25, compared to ~11,000 in FY24 and ~8,000 in FY23. Of the FY25 cohort, ~25% of these were from the construction industry, by far the most represented industry. Furthermore, on a proportional basis, the industry is representing an increasing number of total insolvencies.[11]

Construction Sector Insolvencies

Whilst these figures are alarming and unfortunate, the headwinds articulated earlier are key drivers. The winds of change might be what the construction industry needed to see conditions improve.

Furthermore, whilst cyclical in nature, the structural foundations of the industry appear to remain as strong as ever. Some of the risk mitigation factors which aid the building products & materials industry include:

• The essential nature of products/services provided by the building materials companies;
• The relatively low risk of major technological disruption;
• The multiplier effect it can have throughout an economy, particularly infrastructure spending; and
• The large size and diversity of the market facilitates major players also in addition to plenty of opportunities for smaller players to commend respectable market share levels.

With negative effects hopefully starting to reduce their impact on the sector and with solid underlying fundamentals in place, let's now turn our attention to what we believe to be a very tangible key driver for the industry over the coming 5-year period.

The National Housing Shortage (which we all know about, but which hasn’t been fixed)

One cannot open a newspaper without reading about the unfortunate nationwide housing crisis. Here are the facts of where we are today:

• Rental vacancies are at record low levels (~1%);
• Housing approvals are ~50% below their record highs (but appear to have bottomed out);
• The nationwide supply of apartments is at near decade lows;
• There is mismatch between the rate of household formations versus the supply of households (the former > the latter)

Whilst an immediate solution to Australia’s housing crisis is simply not available, the Federal Government has set a target of building 1.2 million well-located homes for the next 5 years to June 2029 (i.e. 240,000 per year). These targets to date have appeared to be far too optimistic to be even close to reality. The nation’s peak industry body, Master Builders Australia estimates we will only hit the target in one out of the five years in question.

New Dwelling Starts – Below Target Until FY28 (Houses in Grey, Apartments in Red)[12]

So, what does all this information mean for the building materials industry? The supply shortage has become so acute that the situation is leading to change. Housing targets have been set; red tape is being reduced and the effort to mobilise has begun.

(Death, Taxes &…) Infrastructure Spending

Along with the obvious life certainties, we would argue infrastructure spending could be put in the same category. In Australia, there is a consistent ‘maintenance infrastructure’ spend which needs to occur across all asset classes. When it comes to growth in aggregate spending, all that changes is the billions of dollars of difference from year to year that are spent on what projects and in what areas of the country.

ASX listed conglomerate, Seven Group Ltd (ASX:SGH) recently published a chart in their investor day presentation referencing a figure of ~$1.7 trillion to be spent within Australia on infrastructure and construction projects over the next 7 years. For that to occur, that equates to a ~$50b increase in annual spending from FY24 through to FY31 (to $270bn).

Australian Annual Construction and Infrastructure Spending

Looking out further into the horizon, transitioning Australia to a net-zero economy by 2050 is expected to represent a spend of >USD$1.9 trillion.[13] This is in addition to the more typical cadence of infrastructure spending. See below for a breakdown of how this US$1.9 trillion spending is forecast to occur. The next two decades of infrastructure spending in Australia are likely to be enormous. This is before we even consider the rhetoric around an increased level of Defence spending as a % of GDP, which seems to be a position the USA is keen to see their allies such as Australia adopt.

Energy Sector Investment in Australia – Net Zero 2050 Scenario ($USD)

Company In Focus – Big River Industries Ltd (ASX: BRI)

Approximately $13bn of building materials privatisations have occurred over the past 12-18 months (excluding Brickworks Ltd), at what is arguably close to cyclical lows. Quality small cap building materials companies (ASX: ABC, ASX: BLD, ASX: CSR) had all been listed since the 1960s and ASX:AVJ has been listed since the 1930s! Now they are in the hands of strategic buyers. Given the above, where do investors turn to for what is quickly becoming a shrinking exposure in the emerging companies end of the ASX? We believe BRI is a company which very much fits the profile of being knocked down along with the industry & macroeconomic headwinds, but which also stands to benefits from the winds of change when they occur.

BRI was founded over 100 years ago in the mid-north NSW coast. This history is important as it has built brand awareness with many construction and building firms across the country. Over this period of time, BRI has also been able to build out its network of distribution centres, as well as its product offering. With such a long track record, it has stood the test of time of all economic cycles that have come its way.

BRI operates within two subsets of the building materials industry, being:

• Building & construction materials (trade focused only, not B2C)
• Timber panels (trade focused only, not B2C)

In the BRI Building Materials division, there are thousands of independent operators many of whom do not have a succession plan which BRI could therefore consolidate with over time. Bunnings (owned by ASX:WES) and Mitre10 (owned by ASX:MTS) do operate within this trade space, but we believe their focus first and foremost is on their hugely successful B2C hardware operations and secondly within the trade sector gaining further exposure principally to the very large home building companies.

In the BRI Panels division, the market is fragmented, with few competitors having a large distribution footprint or pursuing a consolidation strategy. This makes BRI a logical fit for many independent operators who want to realise some value for their businesses, which have often been built over many decades with valuable longstanding customer relationships.

From a revenue perspective, BRI is ~15% below its peak results, generated at the top of the previous cycle and in a Covid housing development rush (excluding the impact of acquisitions). From an earnings perspective, BRI is ~50% below its previous peak as revenue changes have an outsized earnings impact. With sub-sector exposures across the spectrum of the industry (housing, commercial, infrastructure, civil, multi-residential) as well as a national footprint, BRI is a business with solid diversification, that continues to diversify individual exposures over time.

From its current levels of ~$420m revenue, we believe that over the longer term, underpinned by the abovementioned tailwinds, BRI has the opportunity to become a ~$1bn revenue company. Most importantly, BRI has the opportunity to grow whilst already being a profitable, strong cash generative company and pay a healthy dividend, all the while being a capital-light business model.

Outlook

At NAOS we invest in emerging companies with a high-conviction approach. A key principle of our investment thesis is identifying and investing behind long term industry tailwinds. We firmly believe the building materials sector shows such hallmarks. Can things still get worse in the short term from here before they get better? Sure. In fact, we expect it will. Given equity markets tend to look forward by ~6 months, we think the real question that matters is what are the probabilities that the current situation will be worse in the medium term than it is today? We doubt it, hence the NAOS conviction viewpoint that industry headwinds are shifting to become industry tailwinds.

Quality building materials companies are being taken private by acquirers who are strategic in nature. Perhaps they have been listening to Chumbawamba, or perhaps they believe the building materials companies they have acquired are well placed to benefit from the very material upside of the next growth cycle of the industry. We certainly believe the latter.