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

Decent Earnings Growth Across all Front: Boral Limited (ASX: BLD) is a mid-cap building and construction material company with the market capitalization of circa $5.85 Bn as of December 13, 2018. The group supplies building products to the residential and commercial building markets, operates clay brick business in the U.S. (for clay roof tiles and fly ash) along with the production of plasterboard, timber products, and concrete products. The group operates through three main business divisions, i.e., Boral Australia, USG Boral, and Boral North America which contributed EBIT (excluding significant items) around 62.9%, 9.2%, and 30.2% respectively of total group EBIT in FY18. BLD sales have grown at CAGR of 7.3% during FY14-18 on the back of favorable momentum in the non-residential activity, infrastructure as well as property. Additionally, for FY19E, EBITDA is expected to grow by a single high digit to low double digit on the back of further gains from Boral Australia, improving results from USG Boral and strong growth from Boral North America business segment. The company reported EBITDA margins of 15.6%, a 106 bps improvement on a Y-o-Y basis and this was in line with expectations while Net Profit margin grew by 50 bps and recorded 7.7% in FY18 against the prior year. BLD has a strong balance sheet with interest coverage ratio of 6.6x as at June 30, 2018, decent cash flow and margins with respectable return ratios. It has been paying dividend regularly and maintains decent liquidity ratios as compared to the Industry average. In our view, all these reflect upon operating efficiency and sound financials which ensure future growth of the company on the back of business strategies and synergistic acquisitions. At CMP of $5.010, the stock of the company is trading at P/E 10.00x of FY20E EPS. Keeping in view the attractive structural growth in fly ash, further financial improvement across all segments, and synergy related to the Headwaters deal, we have valued the stock using the relative valuation method and an average P/E multiple of 11.83x (~5.0x discounted to five year average assuming qualitative earnings scenario) to FY20E EPS of $0.50 and have arrived at a target price upside of about double-digit growth (in %) in mid to long term. Key Risks related to rating: climate-related risk, regulatory changes, subdued condition in the key markets, stiff competition in fly ash market, etc.


Key Financial Metrics (Source: Company Reports, Thomson Reuters)

Quick Look at Q1 FY 2019 Performance: In Q1 FY 2019, with respect to Boral Australia, robust momentum was witnessed in the commercial as well as infrastructure activity. The favorable momentum was also encountered in the improvement programs. During the same period (Q1 FY 2019), with respect to Boral North America, construction activities witnessed the impact of the unfavorable climatic conditions. The improvements in operations in Boral North America have been ramping up as well as the growth in the prices was visible.

In Q1 FY 2019, in the USG Boral, robust momentum was visible in the results of Australia and this trend was also visible in the residential activity. However, in the same period, the negative impacts were witnessed in South Korea because of the unfavorable conditions of the weather as well as changing competitive dynamics. With regards to Indonesia as well as Thailand, the impacts of competitions were noted.

Sale of US Block Business – a Strategic Move: Recently, BLD has agreed to divest its Texas-based Block business to Quikrete Holdings, Inc. for the total consideration of US$156 million. This transaction is subject to the customary completion adjustments and regulatory approval and it is expected to settle by the next few weeks. The objective of this divestment is to focus on core operations and strengthen its balance sheet. Moreover, Boral does not anticipate a material after-tax profit or loss on sale of the business. Any gain or loss on sale will be reflected as a significant item in FY19 financial reporting.

Synergistic acquisition with Headwaters strengthens BLD’s platform: In 2017, the company has completed synergistic acquisition of US-based building product and construction material company Headwaters Incorporated for a total consideration of US$2.6 Bn. The objective of this deal was to expand product portfolio with high-quality fly ash business and building material in the US market. This deal also allows Boral to diversify its product segment range across non-residential, repair & remodel, infrastructure segments as well as a new residential sector in the United States. In the FY18 annual report, the company has upgraded its four-year synergy target on Headwaters Inc to US$115 Mn from the previous guidance of US$100 Mn. In our view, this strategic acquisition is a strong fit with Boral’s existing business, and it will support to strengthen the core business in future resulting to topline growth of the company.

Needle on Key Indicators

1. Significant Rise in EBITDA and EBITDA Margin: BLD has recorded EBITDA Y-o-Y growth of 49.0% in FY18 due to full year contribution from Headwaters and strong growth from Boral Australia. Resultantly, EBITDA margin grew by 106 bps and recorded 15.6% in FY18 against 14.5% in FY17. In our view, EBITDA margin is expected to increase by high single digit to low double digit in FY19E from FY18 due to decent EBITDA margins growth across all segments and full recovery of cost rises through regular price improvement.
 

EBITDA and EBITDA Margin on Rise (Source: Company Reports)
 
2. Enhancing PAT and PAT Margin: PAT grew at CAGR of 26.3% during FY14-18 and PAT margin came in at 6.3% on a 5-year average basis (FY14-18). Improved EBITDA and EBITDA margin would lead to improvement in net profit and profit margin especially in view of higher earnings from Boral Australia and a decent result from USG Boral joint venture.
 

PAT and PAT Margin on Rise (Source: Company Reports)
 
3. Garnered Respectable Return Ratios: The company generated respectable return ratios in terms of RoE being at 7.1%, RoIC at 4.8% and RoA at 4.2% in FY18. On the other hand, return ratios have been growing consistently between FY14-FY18 and we expect the same trend to continue in future as well. We see an expansion of 160bps & 90bps expansion in RoE & RoIC, respectively in FY18 against the prior year.
 

Improving Return Ratios (Source: Company Reports)
 
4. Dividend Payout Ratio In-line with the Management Guidance: Based on decent growth in FY18, the Board of Directors declared dividend of 26.5 cents per share, franked at 50%. This represents a payout ratio for the full year of 66%, which is in line with dividend policy of between 50% and 70% of earnings before significant items, subject to the company earnings. The annual dividend yield of the company is about 3.9% on a five-year average basis (FY14-18). Hence, we expect that the company will be able to maintain its dividend yield of above or around 4.0% and dividend payout policy in the range of 50% to 70% in future.


Dividend Payout Ratio In-line with the Management Guidance (Source: Company Reports)
 
Driver for Future: When the company declared the results related to FY 2018, its top management reflected favorable views about the performance. They stated that robust momentum is expected to be witnessed in FY 2019 and the earnings with regard to the Boral North America are expected to encounter significant growth. As per the release, in FY 2019, the earnings for the USG Boral might witness a rise of approximately 10% or even higher because of Indonesia, China, Vietnam, Thailand as well as India. The company’s South Korean as well as Australian businesses might witness strong momentum.

The management of Boral Limited also reflected favorable views for the Boral North America. They stated that Boral North America, in FY 2019, might encounter a rise of approximately 20% or more in the EBITDA because of the synergies amounting to about US$25 million. However, the favorable momentum with regards to the operations as well as the growth of the market would also support Boral North America’s EBITDA. Moreover, the company expects 5% growth in housing starts to $1.3 Mn, ~3% growth in repair and remodel (R&R) and ~2% in non-residential and ~6% in infrastructure activity growth in the US through FY19. Hence, we presume that the company has a healthy outlook because of robust strategy in term of building strong network within the industry and expanding footprints through traditional and non-traditional channels.


Historical P/E Band (Source: Company Reports)

Stock Recommendation and Analysis: In last six months, the stock has fallen 23.11% and is trading at decent PE multiple of 13.26x, indicating undervalued scenario at current juncture. From the technical standpoint, two technical indicators named Relative Strength Index or RSI as well as Exponential Moving Average or EMA have been applied on the daily chart of Boral Limited. For the purposes of the evaluation, default values have been taken into the consideration. As per the observation, the 14-day RSI has started to rebound from the oversold region and it seems like the stock might witness some bullish momentum. Moreover, the stock price is about to cross the EMA and there are expectations that after the crossover, the stock would witness an uptrend.

On the other hand, the company is well positioned to witness strong growth momentum moving ahead. Keeping the view of attractive structural growth in fly ash, further financial improvement across all segments, and synergy related to the Headwaters’ deal, we have valued the stock using the relative valuation method and an average P/E multiple of 11.83x (~5.0x discounted to five year average assuming qualitative earnings scenario) to FY20E EPS of $0.50 and have arrived at a target price upside of about double-digit growth (in %) in mid to long term. Based on potential from synergistic acquisition with Headwaters, decent fundamentals and regular dividend payments to its shareholders, we give a “Buy” recommendation on the stock at the current market price of $5.010.
 

BLD Daily Chart (Source: Thomson Reuters)

 
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