Boral (BLD)

Fat Prophets

Friday 4th April 2014

What’s new

Boral recently unveiled a 73 per cent surge in first-half normalised net profit to $90 million, leading to a 40 percent jump in the interim dividend to 7.0 cents per share, fully franked.

While the earnings result was bang in-line with management’s trading update provided back in January, the details showed that the company is making solid progress in its transformation journey to become a much more focused, capital-disciplined and cost-conscious entity.

We were particularly encouraged by the strong free cash generation and continuing recovery in the operating environment, both domestically and in the US.

Outlook

In our view, management is firmly on track to deliver the $130 million cost savings target for fiscal 2014, having just realised $60 million of reductions in the first half. In addition, free cash generation is improving on a more disciplined approach to capital expenditures, while non-core asset sales have amounted to $212 million in the 18 months to the end of 2013.

Operationally, while wider trading conditions remain uneven across Boral’s many businesses, there is little doubt that underlying demand is improving. Furthermore, the long-awaited return to profitability in the US division appears imminent, with management anticipating breakeven sometime in the current quarter.

Then there is the potential upside from the recently-formed 50/50 Plasterboard and Ceiling JV with USG—a deal that combines Boral’s Gypsum businesses in Asia and Australia with USG’s operations in Asia, New Zealand and the Middle East. The US$500 million received from USG pursuant to the deal has further de-risked Boral’s balance sheet, increasing the potential for capital management initiatives down the track.

Furthermore, the longer term earnings potential of the JV, due to its unrivalled competitive edge, is augmented by US$50 million-plus per annum upside in synergies.

We see all these factors combining to rejuvenate Boral’s return on funds employed back to double-digit percentage levels in the next 3-5 years, from the current 5-6 per cent level.

Price

Shares in Boral have performed solidly in recent periods, rising 18 and 13 per cent over the past 6 and 12 months, respectively. We believe investors are increasingly recognising the company’s inherent earnings leverage to the improving building cycle, both here and in the US. This is at a time when management is actively trying to optimise the cost structure and improve capital discipline.

Worth Buying?

Our positive investment thesis on Boral remains fully intact. The company’s earnings outlook is improving given the recovering building and construction market in Australia, and improving housing starts in the US. There are also further benefits to come from management’s current cost-cutting and business rationalisation initiatives. All this is now augmented by potential upside from the Plasterboard and Ceiling JV with USG.

The stock is currently trading at 26 times consensus fiscal 2014 EPS estimates, falling to 19 times the following year. We do not regard these multiples as demanding, especially for a cyclical stock that is trading at trough-cycle earnings, boasting significant leverage to macroeconomic improvements.

Consequently, we believe the stock is worth buying at current levels.

Greg Smith is the Head of Research at Fat Prophets.

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