Company Overview:Boral Limited is an Australia-based company, which is engaged in the provision of building and construction materials. The Company's products include ash, asphalt, blocks, bricks, cement, cement additives, cement dry mixes, concrete, decorative concrete, lime and minerals, oxides, pavers, pool surfacing, quarry products, retaining walls, roof tiles, stone, structural timber, timber cladding, timber decking and timber flooring. The Company's building solutions include infrastructure solutions and commercial solutions. The Company offers various services, including material technical services, empty pallet pick-up and roof tiling installers. Its commercial construction solutions include industrial, commercial and residential, office blocks and towers, institutional, sporting complexes, and retail and entertainment. The Company manufactures and supplies building products for factory buildings, manufacturing plants and warehouses.

BLD Details

 
Expects to benefit from Headwaters: Boral Limited (ASX: BLD) has finished the acquisition of Headwaters, and has formed a new division combining operations of Boral USA and Headwaters. This is company’s largest acquisition that would more than double the size of its U.S. operations and boosts its fly ash business. This acquisition is expected to deliver savings of $100 million a year within four years of deal closing while also enables Boral to have a U.S. business with an annual revenue of $1.8 billion. Overall, the US$2.6 billion acquisition of Headwaters has transformed BLD into a more global and more resilient building products and construction materials group. Boral is a leader in fly ash technologies in America and is increasing the use of coal combustion by-products in construction. The group has developed patented technologies, using more than 70% recycled by-products for their high-performing TruExteriorTM Trim and Siding products. With the increased infrastructure spending promised by President-elect Donald Trump, the company is expected to benefit from the macro trends. Thus, with the $100 billion infrastructure boom in Australia, expanding profit margin in the U.S., and sustainable demand in both Australia and the U.S., the infrastructure stock seems to be heading for a decent earnings growth over an extended period.
 
Strong FY17 Financial Performance showing continued transformation: BLD has reported a 28% growth in the underlying profit after tax before significant items to $343 million in FY 17. The sales revenue grew 2% to $4.4 billion on the prior year, including eight weeks of revenue from the Headwaters acquisition as well as underlying business growth.The profit is mainly owing to the decline in net interest expense on a year-on-year basis on the back of positive cash balance for part of the year post the equity raise, and a steady income tax expense as a result of the recognition of previously unrecognized tax losses in Australia and the US, and a benefit arising from the vesting of long term incentive payments. Moreover, the BLD’s safety performance for the year remained strong relative to industry peers, with a further 8% improvement in the recordable injury frequency rate to 8.1 delivered in FY17. Additionally, BLD’s Earnings before interest and tax (EBIT) before significant items has increased 16% to $460 million, due to the growth in all three divisions, which includes Boral Australia, USG Boral and Boral North America. Further, the increase in EBIT reflects BLD’s high-performing business in Australia, supplying continued strong east coast residential markets as well as growing infrastructure volumes linked to major public sector spending, especially in NSW, where the company has a strong market position. In addition, BLD delivered above cost of capital returns in two divisions- Boral Australia and Boral North America. On the cash flow front, their operating cash flow fell 13% to $413 million driven by better earnings and lower tax payments which were offset by acquisition, integration and restructuring costs, as well as rising working capital on the back of better revenue turnover in May and June for Boral Australia. The group controlled their capital expenditure by 5% to $340 million while controlled their free cash flow mainly on the back of Headwaters acquisition. But proceeds on sale of 40% share in Boral CSR Bricks JV offset the cash flow performance to a certain extent. The group got over $2 billion of cash proceeds from capital raisings to support Headwaters acquisition.

FY 17 Financial Performance (Source: Company Reports)
 
Economic indicators for performance:Engineering activity has been subdued in FY17 impacted by ongoing slowdown of mining and LNG project activity, which seemed to have offset the improving activity in railways and electricity. On the other hand, the group has a large exposure to the roads, highways, subdivisions & bridges (RHS&B) segment in Australia. RHS&B value of work done (VWD) probably have surged 14% on a year-on-year basis in FY17 while a further 15% rise is expected in FY18. Moreover, the New South Wales housing activity is picking up, with housing starts rising 3%. On the other hand, starts in Victoria, Queensland, Western Australia and South Australia fell over 7%, 14%, 22% and 9%, respectively.


Boral proforma external revenue by market (Source: Company Reports)
 
Ongoing cost control: Headwaters acquisition is expected to have one-year synergies of US$30m-$35m with a run rate of US$50-55m at end of one year. Meridian Brick JV synergies of US$25m p.a. being delivered within 4 years (by Nov 2020) with US$8m run rate at end of FY17, are tracking well. On the other hand, the corporate costs in FY18 will be slightly higher than FY17 due to additional innovation spend of approximately A$3-$5 million. Moreover, Headwaters post acquisition Purchase Price Allocation (PPA) adjustments are underway, and the additional D&A is likely to be approximately US$30-35m p.a. The group D&A will be approximately A$390-410m in FY18 (including amortization of over A$70-$80 million in FY18 and is subject to PPA finalization). Additionally, the total Boral capex is forecasted to be over A$425-$475 million p.a. (including incremental Headwaters capex). In FY 18, the cost of debt would be over 4.75% to 5.00% p.a. The gearing of 30% is within comfort range and is expected to be cut to over 25% in coming years. The implementation costs are expected to be US$90-100 million in the coming two years, FY18 & FY19. Further, FY18 dividend is expected to be partially franked in the range of 50-70% with payout ratio to be over 50-70% of earnings before significant items, although subject to company’s financial position.
 
Outlook for FY18:For Boral Australia, the group forecasts a better EBIT in FY18 over FY17 excluding property in both years. The first half and second half EBIT is anticipated to be broadly balanced. The group expects their property earnings in FY18 to be at lower end of historical range ($8m-$46m) and the EBIT in FY18 including property is forecasted to be broadly similar to FY17. The target market for this segment, the detached housing as a proportion of total continues to be at low levels at over 52%, as compared to a 20-year average of 64%. The group expects their Australian housing activity to be down by over 12% to over 190,000 starts in FY18. Moreover, the Australian housing started at a moderate level as compared to the record high of over 234,000 in FY16, which is forecasted for 8% fall to over 216,000 in FY17. On the other side, for USG Boral, the profit is expected to grow at a high single digit growth rate in FY18.  Sheetrock is anticipated to deliver price, volume and cost benefits across all markets and the improvements are likely to come from Indonesia and Thailand businesses, while softer activity is projected in Australian and Korean residential construction markets. Further, for Boral North America, there is an expectation of a major growth in EBIT in FY18 from the full year contribution of Headwaters along with US$30-35 million of year 1 synergies. Meridian Brick JV is forecasted to contribute an earnings uplift from market growth and synergies. The North America business should benefit from projected market growth of over 8% in housing starts (to be over 1.29 million in FY18), 5% rise in US infrastructure activity, 12% growth in non-residential activity and over 6% growth in Repair & Remodel market.


Improving activity in major markets (Source: Company Reports)
 
Stock Performance: The shares of BLD stock have risen 24.3% in this year to date (as of October 13, 2017) and has a good dividend yield. The group intends to leverage the ongoing recovery in the US housing market and is well positioned to benefit from a broader construction market growth, and sustainable demand across key regions with enhanced market position in fast growing Asia region via Sheetrock® brand products, displaying continued penetration opportunities. Looking at the prospects, we give a “Buy” recommendation on the stock at the current price of $6.85
 
BLD Daily Chart (Source: Thomson Reuters)

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