Boral Limited

Headwaters' Acquisition Supported the Overall Growth in 1H FY19: Boral Limited (ASX: BLD) operates through its three segments which include Boral Australia, USG Boral and Boral North America. The company offers infrastructure and commercial building solution along with providing wide range of products and services required for construction. The company recently, informed that Blackrock group has raised its voting power in Boral to 7.02% from a previous of 6.01%.


1H FY19 Results Highlights (Source: Company Reports)

The company exhibited steady EBITDA numbers to $485 million in 1H FY19 (down 3%) excluding the impact of divestments. The company witnessed strong underlying performance which were impacted by adverse weather, particularly in North America as well as project related volume delays in Australia. Revenue from continuing operations was up by 4.6% to $2928.8 million in 1HFY19 as compared to $2,798.7 million, primarily driven by North America segment which recorded a growth of ~11% in top-line for the same period.

Boral North America posted healthy EBITDA growth of 9% with EBITDA margin at 18%. Additionally, the Headwaters acquisition is delivering substantial growth and is expected to drive return on fund employed (ROFE) improvement, going forward. A strategic shift from high fixed cost capital intensive to variable cost model led the segment to perform better through cycles. Further, on strategic front, the company is working with Knauf to progress a value creating strategy for the USG Boral plasterboard business.

The company reported operating cash flow to $253 million, up by 17% which was underpinned by reduction in Headwaters integration costs compared to 1H FY2018, higher working capital and debtor days. Unbilled receivables in Fly Ash of $28 million is expected to be collected in 2H FY2019. The free cash flow was also reported to be higher.

The company has maintained a strong balance sheet and flexibility to fund growth, with the net debt as on 31 December 2018 at $2,295 million, down from $2,453 million at 30 June 2018. Proceeds received during 1H FY2019 from the sale of Denver Construction Materials and US Block were partially offset by adverse exchange rate impacts.

The operating margin and net margin improved marginally by 80bps and 30bps respectively. Among the key ratios, the asset turnover improved by 160 bps to 0.31x on the prior corresponding period, with ROE improving marginally to 3.3% in 1HFY19. The company delivered a return on funds employed (ROFE) of 8.1%, with its Australia’s ROFE of 15.9%. USG Boral delivered a lower underlying ROFE of 8.1% due to softer earnings.

FY19 Outlook: The company expects the EBITDA in FY2019 to be broadly in line with the previous year. (excluding property). The company expects its property earnings in FY2019 to be around $30 million as compared to $63 million in FY2018. In the North America segment, the company expects the spring recovery to benefit from March combined with a modest level of continued growth in underlying market demand across end-markets. The company has an expectation of price growth for most of its products, thus, improving margins.

Stock Recommendation: The stock is currently trading closer to its 52-week low price. We believe that decent underlying financial performance, robust fundamentals, and steady net debt level for the company augur well for the growth, going forward. Moreover, acquisition synergies of US$14 million were delivered in 1H FY19 (via Headwaters acquisition). Going forward, the company is on track to deliver four-year target of US$115 million. Considering the above-mentioned facts, we recommend a “Buy” on the stock at CMP of $4.910 (up ~4.69% on 20 May 2019).   

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