Stocks’ Details
 

Fletcher Building Limited

Amendments to Banking Agreements:Fletcher Building Limited (ASX: FBU) is primarily involved in the manufacturing and distribution of building materials and residential and commercial construction. The company had contracted with ACCIONA to form a joint venture for building a motorway between Pūhoi and Warkworth, which is expected to be open to motorists in time for the busy Queens Birthday weekend in 2022, subject to no additional challenges. The motorway was earlier scheduled to open at the end of 2021 but got delayed due to COVID-19 shutdown. The agreement includes a payment of $85 million to Fletcher/ACCIONA, to cover the cost of the delays and other impacts resulting from the five-week COVID-19 shutdown. 

Repayment of USPP Notes:The company recently decided to repay US$300 million of USPP notes, which were issued in 2012 and due to mature in 2022 and 2024. The notes represented the most expensive source of debt, with an average cost of funding of 5.4%. This would reduce the company’s funding costs by cNZ$17 million per year, leaving Fletcher Building with significant liquidity of cNZ$1.1 billion.

Update on Banking Agreements: The company recently announced amendments to its banking agreements to reinforce its resilience for the medium-term. Under the agreements, the Company may elect to rely on more favourable levels for its Total Interest Cover, i.e., 1.5 times (normally 2.0 times) and Senior Interest Cover, i.e., 2.25 times (normally 3.0 times) covenants for the period from June 2020 to December 2021, if required. EBIT in 4Q20 for the purposes of testing these interest cover ratios has been set at NZ$231 million. Ross Taylor, CEO, also confirmed that compliance with normal covenant levels was expected in June 2020.

Trading Update: Due to Level 4 lockdown in New Zealand and Australia revenues running at around 90% of pre-COVID-19 expectations, the company recorded an operating EBIT loss for April at cNZ$55 million. After the return to Level 3 restrictions, the New Zealand construction has begun functioning. The company’s New Zealand businesses are currently trading at around 80% of forecasted revenues in May, while Australia continues to trade at around 90% of pre-COVID-19 expectations. In March 2020, the company decided to cancel the FY20 interim dividend and to suspend to on-market buyback programme, pursuant to its cash protection measures. In 1HFY20, group revenue amounted to NZ$3,961 million, down 5% on pcp, due to reduced revenue on legacy construction projects and tougher market conditions in Australia.


1HFY20 Divisional Performance (Source: Company Reports)
 
Outlook: In response to the market downturn, the company expects to reduce its spending and implement cost-saving measures to maintain liquidity. The company will modify its operational footprint by exiting some offices, will improve the efficiency of its supply chains and plans on ceasing some unprofitable product lines. The company will release FY20 financial results on 19^th August 2020. The decision regarding the FY20 dividend in August will be taken with regard to the impact of COVID-19, the trading environment and outlook, as well as the terms of the amendment to banking agreements.

Key Risks: The current economic environment has significantly impacted the business and is expected to adversely impact customer demand across all the businesses. Due to pressure arising from COVID-19 containment measures, the company expects to experience sustained lower levels of productivity. 

Valuation Methodology:P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 
Stock Recommendation: The stock of the company gave positive returns of 8.49% in the last three months. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a price correction of low single-digit upside (in percentage terms). For the purpose, we have taken peers such as Boral Ltd (ASX: BLD) and James Hardie Industries PLC (ASX: JHX), etc. Considering the anticipated impact of COVID-19 on demand, cancellation of dividend, uncertainty regarding the declaration of FY20 dividend and valuation, we have a watch stance on the stock at the current market price of $3.47, up 0.58% on 1^st July 2020.
 

Boral Limited

Cash and Undrawn Committed Funds of ~$1.3 billion: Boral Limited (ASX: BLD) is engaged in manufacturing and supply of building and construction materials. The company recently announced that the voting power of the SGH Group increased to 12.19%. As per another update, Zlatko Todorcevsk was appointed as the Chief Executive Officer (CEO) & Managing Director, effective 1 July 2020.

Litigation with Respect to Cement Supply Agreement:It was notified that the Supreme Court has reserved for further consideration the final orders to be made in relation to the litigation between Wagners Holding Company Limited and Boral Limited, with respect to the Pricing Notices issued by the latter under the Cement Supply Agreement.

New Debt Facilities: The company has recently priced a US$200m USPP senior, unsecured note issue. The company also secured approvals to extend US$665 million of its existing US$750 million debt facility by way of a number of new bilateral loan facilities, which will extend the maturity of this debt from FY22 to FY24.

COVID-19 Impact: In Australia, significant bushfire impacts, followed by extreme weather conditions and COVID-19 disruptions, led to a decline of ~16% in concrete volumes and a decline of ~6% in revenue, over the four months ended April 2020. Around 70% of the building products plants in Boral North America were impacted due to COVID-19 restrictions.

1HFY20 Performance: In 1HFY20, the company’s reported revenue and EBITDA amounted to $2,960 million and $493 million, respectively, with solid underlying activity in the most markets. Revenue from Boral Australia stood at $1,752 million, down 2% on pcp. Boral North America reported revenue amounting to $1,208 million, up 4% due to Light Building Products & Fly Ash sales.


Financial Highlights (Source: Company Reports)
 
Outlook: Due to the high level of uncertainty regarding the duration and impact of COVID-19 on its markets, Boral Limited withdrew its earnings guidance for FY20. Considering the expected demand interruptions, the company is taking measures to conserve cash, by reducing all non-essential capital expenditure and discretionary spending.

Key Risks: Due to the current market conditions, the company is expecting a decline in demand driven by a slowdown in residential construction activity. Considering the current scenario, the duration of the decline in demand seems unpredictable. Other risks for the business involve the monetary policies in the countries where Boral operates, geopolitical effects in the markets and the availability and cost of labour, raw materials and transport services.

Valuation Methodology:P/CF Multiple Based Relative Valuation (Illustrative)

P/CF Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 
Stock Recommendation:The stock of the company gave positive returns of 14.16% in the last one month (as at 30 June 2020). Including the new debt facilities, the company has available cash and undrawn committed funds of ~$1.3 billion on a pro-forma basis. Moreover, the company will receive $73 million from the sale of Midland Brick is expected in the June quarter. We have valued the stock using the P/CF multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For the purpose, we have taken peers such as James Hardie Industries PLC (ASX: JHX) and Fletcher Building Ltd (ASX: FBU), etc. Hence, we give a “Buy” recommendation on the stock at the current market price of $3.91, up 3.166% on 1^st July 2020.
 

Amcor Plc

Net Sales Up ~36% in 3QFY20:Amcor Plc (ASX: AMC) is a global leader in developing and producing responsible packaging for food, beverage, pharmaceutical, medical, home- and personal-care, and other products.

The company recently announced regarding the offer and sale by Amcor UK of €500,000,000 aggregate principal amount of its 1.125% Senior Notes due 2027, net proceeds out of which are estimated at €494.5 million. In another announcement, the company updated regarding the offer and sale by Bemis of US$500,000,000 aggregate principal amount of its 2.630% Senior Notes due 2030, with net proceeds estimated at US$496.2 million. The proceeds will be utilised for general corporate purposes and for the part repayment of commercial paper and bank drawdowns. As per another update, the company was recently removed from the S&P/ASX 20 Index, effective at the open on June 22, 2020.

Financial Highlights for the Quarter Ended 31^st March 2020: During the quarter, net sales amounted to US$3,141 million, up from US$2,309.9 million in pcp, driven by favorable volumes of 2.0% and acquisition-related impacts.Gross profit for the quarter came in at US$652 million, as compared to US$419.8 million in pcp. The company reported net income amounting to US$183.6 million, up on pcp net income of US$112.4 million. In June 2019, the company acquired 100% of the outstanding shares of Bemis Company, Inc., a global manufacturer of flexible packaging products based in the United States, expanding its global footprint in flexible packaging and greater scale in key regions of North America, Latin America, Asia Pacific and Europe. Cash and cash equivalents as on 31^st March 2020 stood at US$3.3 million.


Income Statement (Source: Company Reports)
 
What to Expect: The company expects to realise ~US$180 million of pre-tax synergies from the acquisition of Bemis, driven by procurement, supply chain, and general and administrative savings by the end of fiscal year 2022.

Key Risks: Risks for the business may relate to  loss of key customers, a reduction in their production requirements or consolidation among key customers, price fluctuations or shortages in the availability of raw materials, energy and other inputs, changes in consumer demand patterns, and significant competition in the industries and regions of operation.

Valuation Methodology:P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 
Stock Recommendation: The stock of the company gave positive returns of 11.38% in the last three months and is currently inclined towards its 52-week high price of $16.740.We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). For the purpose, we have taken peers such as Orora Ltd (ASX: ORA), Pact Group Holdings Ltd (ASX: PGH) and Incitec Pivot Ltd (ASX: IPL). Considering the performance in 3QFY20, expected synergies from Bemis, and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $14.62, up 0.967% on 1^st July 2020.
 
 
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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