Boral Limited

Headwaters Acquisition Synergies Supported Growth: Boral Limited (ASX: BLD) is engaged in the manufacturing and supply of building and construction materials in Australia, the USA, and Asia. The company recently, declared a final dividend of 13.5 cents per share (50% franked) which will be paid on 1 October 2019, resulting in a full year dividend of 26.5 cents, steady on last year.

Key Highlights of FY19 Results:The company recently posted its full-year results for FY19 wherein net profit after tax before amortisation (NPATA) & significant items posted a YoY decline of 6% to $486 million. Net profit after tax (NPAT) before significant items at $440 million was down 7% on a YoY basis. Statutory NPAT recorded a fall of 38% to $272 million on FY18, reflecting significant items of $168 million including a net impairment of $174 million for the Meridian Brick joint venture.

Earnings before interest, tax, depreciation & amortisation (EBITDA) for FY19 at $1,037 million was slightly below the EBITDA of $1,056 million, last year. EBITDA for continuing operations posted a growth of 2% to $1,033 million, reflecting a $66 million EBITDA lift from Boral North America, partially offset by lower earnings from Boral Australia, including $30 million of lower Property earnings, and a lower contribution from USG Boral. The company achieved better than expected Headwaters acquisition synergies, delivering US$71 million in synergies to date, with a four-year synergy target of US$115 million.


FY19 EBITDA up 2% for continuing operations (Source: Company Reports)

Coming to the segment wise performance, Boral Australia’s EBITDA witnessed a fall of 6% (yoy) to $593 million owing to lower earnings from the property which stood at $33 million in FY19 compared to $63 million in the prior year. Boral North America witnessed a rise of 3% in revenue to US$1,592 million with EBITDA growth of 10% to US$297 million for continuing operations. USG Boral’s underlying EBITDA at $252 million posted a de-growth of 6% in FY19.
 
Outlook for FY20: Considering the performance in FY19 and trading environment through July and August 2019, the Management has forecasted NPAT for FY20 to be ~5-15% lower than FY19.

Stock Recommendation: At the current market price of $3.940, the stock is available at a price to earnings multiple of 11.530x. In the last 6 months, the stock has gained around 1.22% return and is currently, trading at the lower end of its 52-week trading range of $3.930 to $7.420. Annual dividend yield for the stock stands at 5.44%. The company released its FY19 results with a decline in NPAT, led by lower earnings in Boral Australia and USG Boral, partially offset by underlying earnings growth in Boral North America, together with higher depreciation charges. Taking into account the overall business scenario and performance of July and August 2020, the Management forecasted a lower growth in FY20. With the developments and correction seen in stock price, we are of the view that most of the negatives are discounted at current levels. Hence, considering the aforesaid facts, we give a “Hold” rating on the stock at the current market price of A$3.940 per share (down 20.565% on August 26, 2019 owing to the release of FY19 results).
 

G8 Education Limited 

EBITDA to Cash Flow Conversion at 108%: G8 Education Limited (ASX: GEM) is engaged in the operation of early education centres owned by the Group. The company, for 1H19, announced a fully franked dividend of 4.75 cents, an increase of 0.25 cents per share on 1H18 dividend.

1HFY19 Performance: The company recently released its results for the first half of FY19, which highlighted thegrowth of 8.6% (pcp) in revenue to $430.6 million. The growth in the top-line was largely driven by occupancy, fee growth and acquired centres. Underlying EBIT for the period came in at $51.6 million, in-line with consensus and 7% above prior corresponding period. Statutory profit after tax of $19 million posted a fall of 20% due to the implementation of the new Accounting Standard AASB 16 Leases Standard. Average like?for?like occupancy grew 1.5% points on pcp, owing to the implementation of the customer engagement centre, group?specific initiatives and the Child Care Subsidy (CCS).


Operating Performance in 1H19 (Source: Company Reports)

Stock recommendation: The company witnessed strong progress in strengthening the foundation with education strategy roll-out on track. The company also mentioned that all 500 centres are connected to the Customer Engagement Centre, which is in-line with April target. During the period, GEM completed the restructuring of the balance sheet with repayment of SGD$270 million bonds funded by syndicated debt facilities. EBITDA to cash underlying conversion at 108% indicated continued strong cash flow generation and efficient working capital management. The company was conservatively geared at 28.3% in 1H19. Return on capital employed (ROCE) at 11.2% was in-line with the prior year and is expected to trend higher as the core portfolio delivers organic growth and the greenfield centres mature. Currently, the stock is priced close to its 52 weeks low level of $1.880 with PE multiple of 17.27x. Hence, considering the aforesaid facts and current trading levels, we recommend a “Hold” rating on the stock at the current market price of $2.300, down 16.058% as on 26 August 2019. The sharp correction in the stock on 26 August 2019 was on account of softer results along with a 20% decline in NPAT.

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