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

Half-Year Results Demonstrates Strong Underlying Businesses: Boral Limited (ASX: BLD) is a mid-cap building and construction material company with the market capitalisation of ~$5.7 Bn as of 18 April 2019. Recently, the group reported its 1H FY19 results, wherein NPAT and EBITDA before significant items came in at $200 Mn and $485 Mn, respectively which are in-line with the unaudited results. During the period, the company delivered excellent safety improvements with the lost time injury frequency rate of 1.1 as compared to 1.6 for FY2018. Further, it announced that the company made progress on value-creating growth strategy for USG Boral JV deal. For that matter, the company has executed non-binding term sheets with Knauf, subject to valuations, negotiation, and execution of the definitive documents, and completion of USG Knauf Merger Agreement, which could lead to the formation of Boral and Knauf new joint venture (JV) for its respective Asian plasterboard businesses. BLD is working with Knauf to progress a value-creating strategy for USG Boral plasterboard business. With respect to strategic growth opportunities for USG Boral, BLD’s top management stated that USG Boral business is highly attractive gypsum business which entitles outstanding long-term growth prospects. In 1H FY19, Boral Limited’s statutory NPAT including significant items amounted to $237 million reflecting the rise of 37% on the YoY basis. The company’s sales revenue amounted to $2.99 billion reflecting the rise of 2% YoY which indicates modest revenue lift in Boral North America and Boral Australia. In 1H FY 2019, Headwaters synergies stood at US$14 million against the full-year target of US$25 million. On the back of decent fundamentals and robust underlying activity in the key markets, the company announced interim dividend amounting to 13.0 cents per share which reflects a 4% YoY increase. We are optimistic about the company performance at the back of decent financials, paying regular dividends, securing contractual agreements, synergistic acquisitions, retained strong underlying demand in all three business divisions, i.e., Boral Australia, Boral North America, and USG Boral. At CMP of $4.87, the stock of the company is trading at P/E multiple 10.73x of FY20E EPS. Keeping the view of a decent outlook in the business amidst short-term challenging market dynamics, we have valued the stock using the Relative valuation method (Price/Earnings ratio) and five-year average P/E of x for FY20E (discounted ~3x to five year average considering quantitative earning scenarios related to housing market in US and Australia) with consensus EPS of $0.45 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)

Marginal rise on Margins’ Front Amidst Challenges: Boral Limited possesses a decent position in its key margins amidst certain challenging market dynamics. On the margin front, operating margin and net margin expanded by 80 bps and 30 bps to 9.75% and 6.5%, respectively in 1HFY19 against the prior corresponding period. It reflects progressive growth across overall businesses along with lower finance cost despite a higher effective tax rate incurred during 1HFY19 against 1HFY18. The current ratio of BLD stood at 1.84x in 1H FY 2019 which implies a YoY rise of 49.4% demonstrating the improvement in the liquidity levels. This reflects that the company has sufficient liquidity to meet its short-term obligations and has an ability to capture growth opportunities moving ahead.  

Increased Contributions From Quarries, Cement And Asphalt In Boral Australia: The revenues in Boral Australia stood at A$1,825 million reflecting a marginal rise of 1% (YoY) with higher contributions from Quarries, Cement and Asphalt but lower revenue from concrete & placing. The segment’s lower earnings and margins were mainly impacted by lower concrete volumes and inefficiencies from the project delays and adverse weather in NSW in October. However, the supply chain transformation program is progressing in order to reduce the costs. Also, in Boral Australia, the company has been targeting recovery of cost increases through price. During the period, the Group completed the divestment of its Concrete and Quarries business in Denver, Colorado and the divestment of its US Block business. And, it is classified as a discontinued operation in the consolidated statement of the operation.


Boral Australia (Source: Company Reports)

Headwaters Acquisition Synergies Progressing Well: Boral North America managed to deliver half-year EBITDA amounting to US$141 million which reflects 9% increase on the YoY basis and the segment also witnessed strong and improving EBITDA margins nearing 18%. The company’s management had stated that, with respect to the integration of Headwaters acquisition, further synergies amounting to US$14 million were delivered in 1H FY 2019, adding to US$39 million already delivered, and on track for US$115 million in year 4. The segment reported revenues amounting to $1,104 million which reflects the YoY increase of 11% and was primarily because of strong growth in Roofing. However, volumes got impacted by the extreme rain in the key US states. The EBITDA growth and margin expansion were because of increases in price and synergies. In FY2019, there is a target to recover the cost increases through price.


Boral North America-Synergies (Source: Company Reports)

USG Boral Witnessed YoY Growth in Revenues: USG Boral generated revenues amounting to A$831 million which reflects the rise of 2% on the YoY basis on the back of volume growth in Australia, Indonesia, Vietnam and India, higher non-board revenue and FX impacts. The management added that USG Boral happens to be strong and it contributed $25 million of equity income to Boral in 1H FY 2019.


USG Boral (Source: Company Reports)

A Look at Recent Update: Wagners Holding Company Limited, through a subsidiary Wagners Cement Pty Ltd, is a party to Cement Supply Agreement with Boral Resources (Qld) Pty Limited and Boral Limited. In accordance with the Cement Supply Agreement, BLD is required to purchase a minimum volume of cement from Wagners Holding Company on an annual basis at a determined price. As per the CSA, BLD is entitled to issue a notice to WGN along with a bona fide offer from a third-party supplier of cement. If pricing notice is both a bona fide offer which complies with requirements of CSA and is supported by the market pricing evidence which provides for a price lower than currently charged by Wagners Holding Company, then WGN may elect to either reduce price of the cement products supplied to BLD to the price which is notified in pricing notice or suspend the supply of cement products for a period of up to six months.

Decent Dividend Pay-out Ratio Might Attract Attention: Boral Limited declared an interim dividend amounting to 13 cents per share (franked to 50%), for 1H FY19, reflecting a rise of 4% on the YoY basis representing dividend pay-out ratio of 76% which can be considered at decent levels. The company’s annual dividend yield stood at 5.56% which is higher than the peer median of 2.8% reflecting that the company is shelling out better dividends as compared to its peers. Also, Boral’s operating cash flow witnessed the rise of 17% and stood at $253 million which builds confidence in the company’s operations. The company’s underlying activity in its key markets is robust which might help it in witnessing sustainable growth and this further indicates that the company will continue to distribute its profits to its shareholder, as per historical dividend trend. The franking rates for the dividends are anticipated to continue to be partially franked at or around 50%.  
 

Earnings and Dividends per share (Source: Company Reports)

What To Expect From BLD Moving Forward: In Boral Australia, Property earnings are anticipated to be approximately $30 million in FY 2019 as compared to $63 million in FY2018. In Boral North America, there are expectations that the business would witness EBITDA growth of around 15% in US dollars for the continuing operations in FY2019 and the synergies amounting to around US$25 million are expected to be delivered in FY 2019. In USG Boral, there are expectations of slightly lower profits in FY 2019 as compared to FY 2018. However, USG Boral might witness YoY improvement in the earnings in 2H FY 2019 including growth in Australia, Indonesia, Thailand and Vietnam.

The strategic priority of Boral Group is to maintain the robust balance sheet and flexibility to finance the growth moving forward. Also, Boral’s EBITDA for FY 2019 is anticipated to be higher than FY2018 for the continuing operations with a skew to 2H FY 2019. With the full benefit from the reduction in the US corporate tax rate, the company’s effective tax rate is anticipated to be between 21–22% and its corporate costs are anticipated to be broadly in line with FY2018. The company expects depreciation and amortisation to be between $380 million–$390 million in FY2019 and capital expenditure for the same period is expected to be between $425 million–450 million.


Historical PE Band (Source: Company Reports)

Stock Recommendation: The stock of Boral Limited has delivered the return of 0.21% on the YTD basis and its return for the three-month period stood at -5.45%. The company’s stock is trading slightly towards the 52-week lower level which provides a decent opportunity for accumulation. Also, Boral’s gearing stood at 30% and is within the comfort range, and there are expectations that it will be reduced in the upcoming years which could further improve the company’s balance sheet position.

With respect to dividend policy, the company stated that the pay-out ratio is expected to be around 50-70% of the earnings before significant items, subject to Boral’s financial position, which can be considered at the decent levels and can attract the attention of market players. Keeping the view of a decent outlook in the business amidst short-term challenging market dynamics, we have valued the stock using the Relative valuation method (Price/Earnings ratio) and five-year average P/E of x for FY20E (discounted ~3x to five year average considering quantitative earning scenarios related to housing market in US and Australia) with consensus EPS of $0.45 and have arrived at target price upside of about low double-digit growth (in %). Hence considering the aforesaid facts coupled with decent financial parameters, we give a “Buy” recommendation on the stock at the current market price of A$4.870 per share (up 0.206% on 18 April 2019).


BLD Daily Chart (Source: Thomson Reuters)

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