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

Boral Limited (ASX: BLD), is a material sector company that is engaged into manufacturing and supply of building and construction materials in Australia, the United States, and Asia. The company operates through varied divisions - Boral Australia, USG Australia, USG Boral in Asia, Australasia and the Middle East and Boral North America. The provider of asphalt, blocks, bricks, cementitious materials, concrete, retaining walls, plasterboards, masonry, and timber products, among many, is engaged in the transport, landfill, and property activities. The group’s FY18 performance was strong; however, start to FY19 was on a lower side with weather related project delays and Berrima outage in Australia. Nonetheless, BLD has retained its FY19 guidance while the EBITDA might settle around lower end of Management guidance. Normalization in weather with price traction can make up to the strong 2H skew as highlighted by BLD. In the long run, delayed projects will deliver when they come online; and USA market will also be a key driver as Boral sees long-term USA growth potential.


Financial Performance (Source: Company Reports and Thomson Reuters)

Softness in First Quarter FY 19 Performance: During the first quarter of FY 19, Boral Australia witnessed that the residential construction is holding up at strong parts and moderating in some parts, while infrastructure and commercial activity remained strong and is growing. In the September quarter, the benefits of very dry weather were partially offset by lower than expected volumes to a number of major projects primarily due to delays outside of control and eight days of lost production at Berrima for repairs and maintenance on the kiln and associated equipment. The reduced production at Berrima did not disrupt supply to customers but resulted in higher costs for the month, which the company now expects to recover as the year progresses. In October, the record wet conditions in New South Wales and up through Queensland have significantly delayed the industry activity. The company’s volumes and earnings were substantially down this month, on the back of the significantly higher than average and higher than prior year number of rain days, which had deferred the project schedules into the second half. BLD continues to secure a good share of infrastructure and major project work, however, the year-to-date concrete volumes to one of the largest major projects in Sydney are lower than the company had expected, and in Queensland, which is a major asphalt road project is tracking behind target. The company is ready to return to higher volumes as these projects are expected to return to schedule. Further, the cost to serve major projects is higher than other work so delays may have a more significant impact on the company’s margins.

However, from past few days, the company has achieved a record daily volume of concrete delivered into the Sydney market. The demand is building up and there is considerable work in the pipeline, and the company is working hard to maintain the reputation as a reliable and committed supplier. Meanwhile, Boral North America division was also adversely affected due to worse than expected weather conditions. Hurricanes Florence and Michael have led to several days of lost production across a number of the company’s plants in the Carolinas and Florida. There has also been heavy and extended periods of above average rainfalls in the South and up through the Midwest and Northeast. Texas, which is Boral’s largest US market, was particularly impacted by rain in September as some parts experienced record September rainfalls. These weather events have caused significant delays in construction activity, and the disruption was similar to the disruption experienced from the two hurricanes last year, but there was no severe damage. The company is expecting some improvements in metal roofing, TruExterior Trim & Siding and Meridian Brick. BLD has planned to increase fly ash volumes by a net 1.5-2.0 million tons over three years. The Montour reclaim project in Pennsylvania has passed critical performance milestones during plant commissioning and the company is scheduled to start selling reclaimed fly ash from this landfill site into the market this week. BLD has also started to import ash into the US market and the rise in price is continuing in fly ash and in other products. On the other hand, BLD has announced the sale of the Texas based Block business for US$156 million. The Block business has performed well, however as per the company it is non-core for Boral and this divestment will help the company to further strengthen the balance sheet and to focus on core operations. The business had contributed approximately US$15 million of EBITDA in FY18.


September 2018 rainfalls (Source: Company Reports)

Sale of US Block business for US$156 million: BLD has agreed to sell its US Block business to Quikrete Holdings, Inc. for US$156 million. This deal is however, subject to customary completion adjustments. The sale is expected to complete around mid-November 2018, after receiving the regulatory approval. The company does not expect a material after tax profit or loss on sale of the business.

Strong FY18 Performance: BLD for FY18 has delivered 47% increase in net profit after tax before amortization and significant items to $514 million. The company has posted 49% rise in the net profit after tax (after significant items) to $441 million. Sales revenue grew 34% to $5.9 billion driven by Headwaters acquisition and strong revenue growth in Boral Australia. The earnings before interest, tax, depreciation and amortisation (EBITDA) before significant items rose 47% year on year to $1.06 billion, compared with last year. Moreover, all the three businesses are performing strongly. In FY18, Boral Australia has reported a 15% rise in EBITDA to $634 million and attractive EBIT returns on funds employed of 17.5%, which is well above Boral’s cost of capital. Boral North America has reported EBITDA of US$284 million, which is 9% above the Proforma combined Boral and Headwaters result last year. USG Boral has also delivered over 80% growth in EBITDA since the joint venture was formed in FY2014, with EBITDA to sales margins growing from 13.6% to 17% over the same period.


FY 18 Financial Performance (Source: Company Reports)

FY 19 Outlook: For Boral Australia, BLD expects high single digit EBITDA growth in FY19 excluding property in both years.  Including Property in both years, the company expects EBITDA to be broadly in line with FY 18. For FY19, Property earnings are expected to be approximately $20m compared with $63m in FY18. The volumes and margins are expected to improve in FY19 compared to FY18. There is an expectation of growth in RHS&B and non-residential demand, which will be more than offsetting moderating residential construction market. There will be strong skew to second half with plans to claw back current shortfall and the company assumes favorable weather for remainder of year, that includes a drier March quarter relative to last year. For USG Boral business, the company expects profit growth of approximately 10% in FY19. The segment’s outlook reflects forecast moderation in residential construction in Australia and South Korea, and improvements in other countries including China, Indonesia, Thailand and India. BLD expects, the segment’s year-on-year growth in earnings are anticipated to come through in the second half of FY19. BLD considers the strategic opportunities options will be accelerated by Knauf’s announced takeover of USG.

For Boral North America business, the company expects the EBITDA growth to be approximately 20% or more in FY19.This is for continuing operations after adjusting for sale of Block. The company expects further synergies to be approximately US$25m and operational improvements. Further, the company expects the underlying market growth to be of approximately 5% in housing starts (to approximately 1.31m), around 3% in repair & remodel, around 2% in non-residential and around 6% in infrastructure (based on external market forecasts). The Fly ash volumes is expected to rise at least in line with cement demand, which reflects the efforts to increase available supply. Additionally, the company expects price growth for most of the products with margins improvement or at least holding across all businesses. Meridian Brick JV is expected to deliver positive and improved earnings in FY 19. There will be strong skew to second half with plans to make up weather-related early shortfall. The company expects favorable weather for remainder of the year, including drier March quarter relative to last year.

Stock Recommendation: Meanwhile, BLD stock has fallen 19.74% in one month as on November 02, 2018 and is trading at a P/E of 15x. BLD is trading at $5.5 and has support at $5.4 level and resistance around $6.4. BLD requires very strong performance for the remainder of the FY 19 and the company is expecting drier weather conditions relative to last year. BLD is now expecting a strong skew in earnings to the second half of the year because results for the first quarter and into October are below the company’s expectation. BLD is working to claw back earnings through volume recoveries, improvement initiatives and cost reductions. Moreover, BLD had posted strong performance in FY 18, with all its core businesses showing strong results. At about low double digit FY19PE, and slight rise in Earnings per share with a conservative stance backed by single digit revenue growth, an early double digit rise (%) can be seen in stock price. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $5.5.
 

BLD Daily Chart (Source: Thomson Reuters)

 
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