Australia | Feb 14 2013
-Quality result and cash flow better
-Tough going in most divisions
-Plans for asset sales
-Question over US trajectory
By Eva Brocklehurst
Australia's largest supplier of building and construction products, Boral ((BLD)), has plans for cost cutting and potential asset sales. Well and good, but there are some doubts as to just how much improvement can be made to the bottom line in the short term, despite what brokers found to be a quality interim profit result. A lot of upside is predicated on a recovery in the US housing market as well as through efficiencies from the divisional restructure.
BA-Merrill Lynch has a Buy recommendation based squarely on the cost cutting and capital discipline the company has shown, along with expected recovery in the US housing market. Deutsche Bank too has a Buy rating, citing significant earnings upside from the $105m cost cutting program, combined with the housing recoveries in the US and Australia. On the FNArena database UBS and Credit Suisse have Buy ratings as well. Macquarie hedges bets and is the lone Hold rating, being a bit cool on just when the US recovery dividend will be realised. Citi, JP Morgan and CIMB have flagged the stock as a Sell, the main reason being the weakness that continues in some quarters which they don't see improving that soon. CIMB finds the share price has run ahead of fair value, although gives the stock a tick for quality and improved cash flow.
BA-ML expects a continued recovery in the US housing market will see divisional losers returned to profitability. In the US, Boral is the largest manufacturer of bricks and clay/concrete roof tiles. It also supplies fly ash. The US housing sector is considered the company's macro exposure and this is trending strongly in a positive direction, according to BA-ML. This should provide a significant tailwind for Boral over the coming years. BA-ML has based its expectations on a stronger second half in the US market, forecasting a 20% rise in housing starts. Macquarie thinks the break even position of the US could be further down the track. The lag displayed by revenue growth in Boral's US cladding and roofing operations means that the US dwelling commencement rate required to reach break even may be pushed out, the broker contends.
JP Morgan continues to see a number of structural headwinds both here and in the US and has cut FY13-15 earnings estimates by an average of 2.2% to account for these. The broker, overall, thinks the way forward continues to look difficult and maintains its Underperform call. Deutsche Bank, on the other hand, is very optimistic on the US recovery and believes FY13 housing starts growth of 27% year on year will be achieved. This broker is also optimistic around the Australian housing recovery, with its analysts expecting housing starts to rise 8.9% in FY14.
The company's construction materials division outstanding, according to BA-ML, with sales up 20% year on year. Macquarie also liked this sector as it benefited from favourable weather conditions, assisting volumes and improved pricing. Deutsche Bank found the strength largely related to strong concrete and aggregate pricing, as well as solid volumes from LNG related project work. This is where the euphoria ends. Australian bricks, plasterboard, timber, windows and cement businesses remain extremely challenged and while the most upbeat, even BA-ML has not factored in a return to prior levels of profitability in its forecasts and valuation in these areas.
Building products revenue, now excluding Australian plasterboard, declined 13%. Deutsche Bank looks the most positive for the segment, noting that, without the one-off charges that affected these results and cost benefits from reduced head count, the second half should be close to break even. Here is where most asset sales could ensue – timber, windows and bricks. Macquarie likes the fact the company plans asset sales of $200m to $300m over the next two years. Potential disposals mentioned in dispatches include US construction materials, Australian windows, timber and non-core assets within the construction materials division. In addition, Boral will be looking to maximise opportunities with its property portfolio to also reduce debt. Nevertheless, all this is not anywhere near a fait accompli.
The newly separated Australian gypsum and plasterboard businesses weren't that hot either. Boral's gypsum earnings were down in both Asia and Australia. Australian plasterboard earnings declined 45% on the prior corresponding half, driven by 5% lower board volume, lower resale and contracting revenues and flat board prices. Asian plasterboard was slightly weaker, driven by challenging market conditions in Korea and China and a $1m negative foreign exchange movement. This was partially offset by growth in Thailand and Indonesia.
But importantly, Credit Suisse finds Boral appears to have a renewed and invigorated approach to maximise returns with emphasis on return on funds employed. The broker is confident in management's capacity to execute this strategy but still believes management's targets will require a monumental effort. Capex reductions impressed Deutsche Bank. Management outlined long term capex/depreciation of 70-75% which is below the 80% the broker conservatively incorporated in forecasts.
The consensus 12-month target price for Boral in the FNArena database is $4.88, or less than 1% below the current trading price. Yet only one Hold (or equivalent rating) has been set from the brokers, with four Buys and three Sells suggesting a split decision on just when the recovery, to which Boral is highly leveraged, will kick in.
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