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Mid-Cap

Boral Ltd - Is it Time to Buy?

September 16, 2015 | Team Kalkine
Boral Ltd - Is it Time to Buy?

Results for the year ended 30 June 2015

The company reported a 45% increase in net profit after tax before significant items to $ 249 million. After including significant items, net profit after tax was $ 257 million up 48 % over the previous year. Sales revenue of $ 4.3 billion was in line with the previous year but the reported sales revenue of $ 4.4 billion was 15% lower than the previous year because of the impact of a full year of 50% post-tax equity accounting in the Gypsum division following the formation of the joint venture with USG on 1 March 2014. Earnings before interest and tax grew by 21% to $ 357 million because of higher earnings from Construction Materials and Cement, Boral Building Products and Boral USA, offset by a lower contribution from Gypsum following a full year of equity accounting for the joint venture.


 
Net debt of $ 817 million as at 30 June 2015 showed an increase of $ 99 million over the previous year largely because of the impact of foreign currency translation of debt denominated in USD. However, gearing at 19% remains low. The company has declared a fully franked final dividend of 9.5 cents per share which is an increase of 19% over the previous year and brings the fully franked dividend for the full year to 18 cents per share.


EBIT Variance (Source: Company Reports)
 
CEO and Managing Director Mike Kane said that the improved performance was reflection of the significant efforts to realise the business portfolio, reduce costs and strengthen responsiveness to change in market conditions. He noted that the company had now moved to the Execute and Transform phase of its Fix Execute and Transform initiative and this is showing up in the improved performance. The cost base has been improved, the balance sheet has been strengthened and the management of business has become more efficient. The company's competitiveness has been strengthened, and the commitment to a safe and healthy work environment continues. The businesses have become more responsive to market dynamics and external drivers than in the past. Growth in some markets enabled the delivery of cost reduction programs and the delivery of increased volumes of land sales to offset reductions in volumes elsewhere. Improvement programs are also being pursued in order to counter the impact of inflationary cost pressures.
 
The realignment of the portfolio is also bolstering the ability of the company to deliver better performance over the long-term. This includes the sale of the Western Landfill business in Melbourne, and the formation of the joint venture, Boral CSR Bricks.
 

Divisional performance

The largest division Construction Materials and Cement delivered an EBIT of $ 301 million for the year which is 9% more than the previous year helped by property earnings of $ 46 million. The strength in the Australian housing market and the New South Wales construction market combined with higher margins in Asphalt, Cement and Concrete Placing because of improvements in operations and costs helped in the achievement of better performance. These benefits were partly offset by lower activity in roads, infrastructure and engineering projects compared to the previous year.


Result Summary (Source: Company Reports)

The smaller Building Products division contributed an EBIT of $ 30 million which was substantial improvement of $ 22 million over the previous year. The results were due to stronger housing activity in most key markets in Australia, improvement in pricing and better operational performance. The Boral USG Gypsum joint venture reported a 38% increase in underlying EBIT to $ 141 million and earnings growth across Australia and Asia resulted in a post-tax profit contribution of $ 49 million for the company. The rollout of world leading technologies in Gypsum is on track and on budget and the early indications of product performance and price premiums are encouraging. After a prolonged spell of depressed market activity in the USA, the US operations returned to profitability during the year with a positive EBIT of $ 6 million. This turnaround of $ 45 million was underpinned by a 10% year-on-year increase in housing starts to 1.05 million and benefits from a cost reduction initiative of $ 20 million.


Revenue Distribution (Source: Company Reports)
 

The outlook for FY 2016

Construction Materials and Cement will focus on maintaining earnings excluding property broadly in line with FY 2015. The benefits from restructuring and improvement along with the continued strength of the construction market in Sydney will be required to offset a depressed construction market in Queensland, subdued activity in roads, infrastructure and engineering projects and the further reduction of volumes in major LNG projects. Property is expected to continue contributing to earnings but the timing and the quantum remain unclear. Building Products will maintain earnings in line with FY 2015 with the benefits from improvement initiatives needed to counter the impact of building activity declining from its peak and the reduced earnings from Bricks East as it moves from 100% consolidated to 40% post-tax equity accounted. Boral Gypsum should continue to produce performance improvements, volumes of new products should continue to grow and synergies will also be strengthened. The synergies are expected to be in excess of the cash costs for the expanded product portfolio and the technology rollout. Finally, better results are expected from USA resulting from the increased housing activity and EBIT is expected to increase. The company is expected to view acquisitions as a strategy considering the target of achieving revenue of about US$2 billion for the US division in the near future.


BLD Daily Chart (Source: Thomson Reuters)
 
It is also noted that companies like BLD will benefit from the steady but healthy activity in building products given the ongoing demand for new residential housing.
 
Given the mixed outlook, we believe that the stock is Expensive at the current price of 5.58.

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