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

Contribution from Headwaters and other Factors Aided BLD in FY 2018: Boral Limited (ASX: BLD) had earlier reported the results for FY 2018. The company happens to be a construction materials’ as well as building products’ group. It operates via three business divisions namely: Boral Australia, USG Boral, and Boral North America. The company’s NPAT before amortization and significant items stood at $514 million in FY 2018 which implies the rise of 47% on a YoY basis thanks to the elevated earnings with respect to the Boral Australia, a contribution from Headwaters (full-year), and robust results from USG Boral joint venture. Talking about other important metrics of the company, its sales amounted to $5,731.1 Mn while the EBITDA stood at $892.9 million which implies the rise of 38.8% and 49.0%, respectively on a YoY basis on the back of Headwaters’ contribution and robust momentum with respect to Boral Australia. The company is currently trading at an FY20E PE of 10.26x which seems to be undervalued at the current juncture. Hence, we continue to maintain our positive view on the company as the management focuses on maximizing performance across three divisions, i.e., Boral Australia, Boral North America and USG Boral which contributed EBITDA around 50%, 29%, and 21%, respectively of total EBITDA in Q1 FY19. The company enjoys decent financials in terms of improving return ratios, healthy balance sheet and paying regular dividends to its shareholders. Seeing the growth potential, we have valued the stock using the two Relative valuation methods, P/E and EV/Sales and 1-year Forward P/E market multiples (discounted ~3x to five year average considering quantitative earning scenarios related to housing market in US and Australia) to FY20E consensus EPS of $0.50 and have arrived at target price upside of about low double-digit growth (in %). Key Risks related to rating: climate-related risk, regulatory changes, subdued condition in housing markets, stiff competition in fly ash market, etc.

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

Improving Initiatives and higher Realization Aided Growth Momentum in Boral Australia: As depicted by Boral’s presentation, the company’s higher costs related to Boral Australia’s division were offset by increased prices and improved initiatives during FY18 and it plans to continue its strategy in FY19E. In Q1 FY2019, with respect to the same division, robust momentum was witnessed in the commercial as well as infrastructure activity. The company had also stated that the prices are witnessing favourable momentum with respect to the majority of the markets. Moreover, improvement programs are also ramping up at a decent pace. The company had stated that in FY 2019, with respect to Boral Australia division, they would be seeking help from the prices so that the increased costs can be recovered. In the same division, EBITDA amounted to $634 million implying the rise of 15% YoY while its EBIT stood at $433 million reflecting an increase of 24% on the YoY basis. The division’s revenues witnessed the rise of 9% and ended FY 2018 with $3,590 million. The favourable momentum in the division was witnessed on the back of increased property earnings, elevated infrastructure, and non-residential activity as well as robust margins.

 
 
Boral Australia (Source: Company Reports)

Revenues and EBITDA Grew YoY in Boral North America BU: In Boral North America business unit, topline and EBITDA grew by 122.3% and 231.5% to $2,141 Mn and 368 Mn, respectively in FY18 over the prior year. The division was benefited from the Headwaters’ contribution which was of full year. The numbers mentioned were garnered from the continuing operations. The division’s EBITDA margin stood at 17.2% in FY18.

 
 
Boral North America (Source: Company Reports)

Premium Sheetrock Product and Technical Board Adoption Supported USG Boral: In FY 2018, the revenues from USG Boral amounted to $1,575 million which reflect the YoY rise of 7% on the back of premium Sheetrock product & technical board adoption which was done in China, Australia, Thailand, and Korea. However, the division’s EBITDA witnessed a hit during the same period. In FY 2018, the division posted EBITDA amounting to $268 million which implies a fall of 5.6% on a YoY basis because of the extraordinary expenses amounting to $11 million as well as operational issues which were encountered in the fourth quarter of the year. However, other factors which impacted the division’s EBITDA were pressures related to pricing as well as elevated input expenses.


USG Boral (Source: Company Reports)

Unloading of US Block Business Aided Focus on Core Business Segment in the US: Not so long ago, Boral Limited had made an announcement related to the sale of the US Block Business. As per the press release issued by Boral Limited, the company’s decision to unload its US Block Business revolves around the fact that the company had decided to maintain its focus towards fly ash businesses as well as core building products which happens to be in North America and Australia’s construction materials. However, the company would also be focused on USG Boral’s gypsum-based wall as well as ceilings business. The company had earlier announced that the sale had been made to Quikrete Holdings. It added that the sale has been decided for the consideration of US$156 million.


Boral North America Organization Structure (Source: Company Reports)

Capital Expenditure Rose YoY: In FY 2018, Boral Limited incurred $425 million towards the capital expenditure which implies a rise of 25.0% on a YoY basis. In FY 2017, the company’s capital expenditure amounted to $340 million. The rise was witnessed because of elevated expenses incurred in the North American region as a result of Headwaters’ acquisition. The company had also stated that the operations might witness some sort of financial risk because of the fluctuations related to some of the commodity prices as well as foreign exchange and interest rates. Therefore, for the management of the risks, the company employs the use of financial instruments.

Decent Dividend Policy Might Attract Investors’ Attention: The company has a track record of consistent dividend payment with a dividend per share of CAGR of 49.8% and 15.3%, respectively over the last five years. The annual dividend yield of the company is about 3.9% on a five-year average basis (FY14-18). In FY 2014, the dividend payout ratio stood at 68.0% and finally, in FY 2018 the payout ratio was 66.0%. However, in FY15, FY16, and FY17, the payout ratios were 56.0%, 62.0%, and 82.0%, respectively. Based on strong performance in FY18, the Board of Directors had declared the final dividend of 14.0 cents per share which implies the rise of 16.7% on the prior corresponding period. This summarized a total dividend payment of 26.5 cents per share for the full year, representing a dividend payout ratio of 66.0% which is in-line with the dividend payout ratio of between 50% and 70% of earnings before significant items. In FY 2017, the company declared the total dividend amounting to 24.0 cents per share. Moreover, the company’s annual dividend yield happens to be higher than the industry median on a TTM basis. The annual dividend yield of Boral Limited stood at 5.2% while the industry median happens to be at 3.6% reflecting the robust financial position of the company. We presume that higher dividend yield as compared to the industry median might also support the Investors' attention moving forward.

Positive Outlook: As demonstrated by AGM presentation of Boral Limited, Boral Australia, in FY 2019, might witness a growth of high single digit with regards to EBITDA. This expectation excludes property in both the years. There are expectations that the Boral Australia might witness property earnings amounting to approximately $20 million in FY 2019. Moreover, this division might witness robust momentum with respect to margins as well as volumes in FY 2019 as compared to FY 2018.

The company’s USG Boral division is expected to witness a rise of approximately 10% in the profits in FY 2019. Moreover, the company’s Boral North America division might witness a rise of approximately 20% or even higher with respect to EBITDA in FY 2019. This growth is expected to come from the continuing operations and that too after the adjustments related to Block sale. With respect to Boral North America, there are expectations that Fly ash volumes might witness a rise at least in pursuant to the demand of cement.

Stock Analysis and Recommendation: In the last three months, the stock has fallen 21.54% as at January 16, 2019 and is trading at reasonable PE multiple of 13.56x, signifying an attractive opportunity for the investors to acquire the stock at these levels. From the technical standpoint, on the daily chart of Boral Limited, Moving Average Convergence Divergence or MACD and Exponential Moving Average or EMA have been applied and default values were considered for the purposes. After careful observation, it was seen that the MACD line has crossed the signal line and is moving in the upward direction. This is a sign that the bullish momentum in the stock might sustain further. Also, the stock price has crossed the EMA and, after the crossover, is trending in the upward direction. This also signifies the bullish sentiment on the stock.

Apart from the technical parameters, the company is expected to get benefit from several other factors i.e., decent financials in terms of improving return ratios, healthy balance sheet and paying regular dividends to its shareholders. The positive expectations for the EBITDA and profit with respect to three divisions of Boral Limited are expected to act as tailwinds for the company. Moreover, the company is expected to get benefit from the acquisition of Headwaters as its exposure to the US markets has increased. The company is very optimistic about the US markets. Additionally, the company’s net margins, as well as operating margin, have improved in FY 2018 on the YoY basis. In FY 2018, its operating margin was 10% which implies the rise of 1.6% YoY while the net margin improved YoY by 0.9% to 6.9%. Seeing the growth potential, we have valued the stock using two Relative valuations (i.e., P/E and EV/Sales) and 1-year Forward P/E market multiples (discounted ~3x to five-year average considering quantitative earning scenarios related to housing market in the US and Australia) to FY20E consensus EPS of $0.50 and have arrived at target price upside of about low double-digit growth (in %). Given the backdrop of above-stated factors, we give a “Buy” recommendation on the stock at the current market price of A$5.140 (up 0.784% on January 17, 2019).

 

BLD Daily Chart (Source: Thomson Reuters)
 

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