1 March 2020
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector : Materials||52-Week Range: A$6.17 – 8.22|
|Industry: Construction Materials||Market Cap: A$8,288.4m|
We rate BLD as a Neutral due to the following drivers:
- Near-term positives priced into current share price in our view.
- Potential interest rate hikes to affect housing activity.
- Boral to benefit from proposed US infrastructure spend.
- Headwaters acquisition to deliver upside in cost synergies. In FY18, synergies achieved were US$39m ahead of initial target of US$30-35m. Synergies target in year 4 was raised from US$100m to US$115m.
- Targeting divestment of non-core assets.
- Expecting Brick JV cost synergies of US$25m over 4 years.
- Headwaters to add capability and scale to the group in the US.
- Better realization of price increases, whilst volumes remain solid.
- Leveraged to a falling AUD versus USD.
- Diversification away from the Australian residential market.
We see the following key risks to our investment thesis:
- Integration risk associated with Headwaters acquisition.
- Cost pressures continue to exceed price increases.
- US housing recovery doesn’t continue as expected.
- Further decline in Asian markets; Thailand and Indonesia.
- Leveraged to AUD/USD.
- Political and economic instability in developing countries.
- Unfavorable weather impacts.
- Stock could re-rate higher should management revise higher synergy benefits to be realised from recent acquisition of Headwaters.
Figure 1: EBITDA by segments
Boral Ltd (BLD) share price was up +10.1% after BLD announced strong FY18 results, with revenue up +34%, EBITDA up +47% and underlying NPAT up +37.9% driven by full period contribution from the acquired Headwaters business and strong operating results from core business Boral Australia.
Boral Australia recorded +15% uplift in EBITDA underpinned by strong growth in infrastructure, higher non-residential activity, higher contribution from property and solid margins.
In the North America business, the acquisition of Headwaters delivered its first set of synergies driving revenue up by +122.3%, however results were adversely affected by unfavorable weather conditions.
Although we see benefit from
1. heightened infrastructure spend;
2. synergies available from the Headwaters acquisition (~A$100m).
We maintain our Neutral recommendation based on subdued conditions in residential sector posing risk to earnings and the stock trades in line with our valuations.
- Management’s commentary on market conditions.
1. In Australia roads, highways, subdivisions & bridges (RHS&B) work done grew by +15% in FY18, with +26% growth in Vic, +20% in Qld, +15% in NSW and +15% in SA. Australian housing starts remain robust, at a rate of 222,000 starts in FY18 (in line with FY2017). Detached housing starts are estimated to be up +3%, with multi-residential starts down -3%. in Vic and SA housing starts increased by +17% and +15% respectively, driven by multi-residential, offsetting -9%, -9%, and -7%, decline in NSW, Qld and WA, respectively, however overall detached housing starts as a proportion of total starts remained at low levels of 54%, compared to a 20-year average of 63%. Management expect housing starts to be down -9% to 202,000 starts in FY19, which is 17% above the 20-year average. Australian alterations & additions (A&A) activity declined by -4%, however non-residential activity grew by +13% in FY18.
2. In Korea, residential market activity underpined market growth in 1H18, however growth moderated in 2H18 as government measures curb rising house prices. In China, general market growth continued, and environmental regulations reduced plasterboard industry’s manufacturing capacity. In Indonesia, activity remained subdued, while in Thailand, construction market continued to decline. Emerging markets of India and Vietnam continued to grow.
3. S. markets remain strong with GDP growth of over 4% and strong unemployment and inflation numbers. U.S. housing starts were up +4% to 1.25m driven by higher single family starts (up +8%), partly offset by a decline in multi-family starts (down -5%). Management expect total U.S. housing starts to grow by ~5% in FY19 to ~1.31m starts. Other U.S. construction markets strengthened with repair & remodel market up +7%, however non-residential construction market activity remained steady. US infrastructure activity was up +5%. Management noted that a severe weather events and wildfires disrupted BLD’s operations and slowed activity, especially in 1H18.
- FY19 outlook.
1. Boral Australia (excl. property) is expected to deliver high single-digit EBITDA growth or more in FY19 and EBITDA to remain at least in line with the prior year if property were to be included. FY19 Property earnings are expected to be $20m (compared to $63m in FY18). The anticipated year-on-year improvement is underpinned by forecast growth in RHS&B (up +8%) and non-residential demand (up +10%). Detached housing starts are forecast to be down -5% and multi-residential starts down -13%. Management expects volumes and margins to strengthen in FY19 relative to FY18.
2. USG Boral is expected to deliver profit growth of +10% in FY19 with moderation in residential construction in Australia and South Korea, and improvements in other countries including China, Indonesia, Thailand and India. Management expects year-on-year improvement in earnings to come through in 2HFY19.
3. Boral North America is expected to deliver EBITDA growth of +20% or more in FY19 (from continuing operations), driven by additional Headwaters acquisition synergies of ~US$25m. Management expects continued growth in underlying market demand, including +5% growth in housing starts, +3% in repair & remodel, +2% in non-residential and +6% in infrastructure with growth in fly ash volumes being in line with growth in cement demand. Price growth and margin improvement is expected for most products.
4. Management expects effective tax rate in the range of 21–23%, cost of debt of ~4.25–4.50% pa, depreciation and amortization to be in the range of $380–$400m, capital expenditure of $400–450m and corporate costs to be slightly higher in FY19, driven by increased investment of ~$4m in product development and innovation.
FY18 RESULTS SUMMARY
Figure 2: BLD FY18 Results summary
- Key FY18 results highlight. When compared to the previous corresponding period (pcp):
1. Group revenue was up +34% to $5.869bn, driven by strong revenue growth in Boral Australia.
2. EBITDA was up +47.0% to $1.056bn and EBITDA margins were up 160bps to 18% over the period.
3. Underlying NPAT was up +37.9% to $473m.
4. Gearing remained unchanged at 30% and BLD delivered a return on funds employed (ROFE) of 8.4%.
5. Operating cash flow of $578m was +40% higher over pcp, reflecting a strong earnings lift from the Headwaters acquisition and Boral Australia, partly offset by higher interest and tax payments. Operating cash flow included $118m in restructuring, acquisition and integration costs.
6. Final dividend of 14cps (50% franked) announced, representing a payout ratio of 66%, bringing the total FY18 dividend to 26.5cps (up +10% over pcp).
- Boral Australia. Revenue increased by +9% to $3,590m, EBITDA of $634m up +15% and EBIT up +24% on pcp, driven by strong growth in infrastructure, higher non-residential activity, higher contribution from property and solid margins. Excluding Property earnings, EBITDA was up +8% and EBITDA margins grew to 17.6% (EBITDA margins of 15.9% excluding Property). Average selling price (ASP) was higher across most businesses, except Quarries, which was impacted by an adverse product mix shift and WA Bricks where conditions remained challenging. Price gains were offset by higher costs including higher energy costs, increased cost to serve due to supply constraints, and increased investment in programs and innovation. ROFE improved from 14.6% to 17.5% in FY18, driven by strong earnings and marginally higher funds employed. Concrete earnings improved significantly, with higher volumes (up +7%) and prices (ASP was up +3% and +2% on like for like) and a growing contribution from major projects including NorthConnex and Pacific Highway in NSW, Amrun in Qld and Forrestfield Airport Link in WA. Asphalt delivered strong earnings growth and improved margins, driven by a +16% revenue increase underpinned by a strong increase in maintenance funding by Vic Roads and infrastructure projects. Quarries earnings were modestly lower reflecting a -5% decline in external revenue. Volumes (internal and external) increased +1% but ASP declined by -3%. Concrete Placing delivered a +58% lift in revenue and higher earnings, reflecting strong underlying market demand. Property contributed $63m EBITDA, compared to $24m in FY2017. Building products and Roofing (including masonry operations in SA and Qld) businesses reported stable revenue, while Bricks WA (including WA masonry) reported declines in revenue and earnings with brick volumes down -11% and ASP down -4%. Timber revenue increased +6% and earnings improved due to favourable product mix and higher prices. Hardwood revenue grew by +6%, reflecting a +3% lift in volumes and +1% increase in ASP however margins were slightly lower.
- USG Boral. Revenue increased +7% to $1,575m driven by continued adoption of premium Sheetrock products and technical board primarily in Australia, Korea, China and Thailand however, underlying EBITDA declined by -6% to $268m with benefits from revenue growth offset by unexpected one-off costs ($11m), higher input costs (particularly paper), and ongoing competitive pressure in Indonesia, Thailand and Vietnam. Excluding one-off costs, EBITDA was slightly lower year on year. Overall board volumes increased +3% and technical board (represents 20% of volumes), grew by +20%. Average plant utilisation of ~80% was up from 76% in FY17. Australia/NZ revenue increased +9% to $577m with solid gains across board and non-board revenue driven by higher volumes. Earnings in Australia were impacted by higher energy costs and higher gypsum costs. Asia revenue increased by +5% to $998m driven by volume and price increases in China and Korea and volume growth in Thailand.
- Boral North America. Revenue of US$1,656m was flat on the prior year due to the inclusion of four months of Bricks revenue in 1H17 prior to the formation of Meridian Brick JV. Excluding Bricks, revenue was up +6% and EBITDA of US$284m was up +9% with benefits from underlying revenue growth and substantial synergies of US$39m resulting in higher margins. During FY18, earnings were impacted by adverse weather (US$15m), one-off plant operational issues (US$10m) and lower profits associated with repositioning fly ash supply in Texas. Fly Ash revenue increased +7% to US$523m, reflecting an increase in site services revenue and an average +9% like for like price increase, partly offset by lower volumes due to weather impacts and supply constraints due to intermittent unplanned power plant outages. Block reported lower earnings with revenue down -4% with volumes impacted by Hurricane Harvey. Building Products revenue was up +7% to US$1,013m and Earnings were up +9%. Stone revenue was down -2%, reflecting -4% lower stone volumes offsetting ASP increase of +2%. Roofing delivered +8% revenue growth to US$320m and higher earnings. Light Building Products (LBP) delivered revenue growth of +6% and synergies of US$11m. Windows revenue saw a lift of +32% reflecting acquisitive growth. Meridian Brick JV delivered a post-tax equity contribution loss of US$1m, due to ongoing restructuring.
Figure 3: BLD Financial Summary
Source: Company; Bloomberg; BTIG
Boral Ltd (BLD) is an international building and construction materials group. Headquartered in Sydney, Australia, Boral produces and distributes a wide range of construction materials which include quarry products, cement, fly ash, pre-mix concrete and asphalt in addition to its building products which include clay bricks, pavers, clay and concrete roof tiles, concrete masonry products, timber, plasterboard and lightweight trim and siding. Boral’s operations are split into three operating divisions, Boral Australia, USG Boral and Boral USA.