Australia | Aug 30 2018
Caution prevailed leading into the Boral FY18 results but positive sentiment has returned amid a robust result and optimistic outlook.
-Guidance may be erring on the conservative side
-Considering the options on the USG JV
-Fly ash sales targets raised considerably
By Eva Brocklehurst
Market expectations were subdued ahead of the Boral ((BLD)) FY18 results and most brokers were pleasantly surprised. Caution had prevailed as peers were reporting underwhelming outcomes.
Some investors, as Ord Minnett observes, were concerned that Australian earnings may be peaking and the North American fly ash business would struggle to grow. However, the broker suggests the company's commentary should ease market fears around these issues.
Boral beat its synergy targets on the Headwaters acquisition, realising US$39m in FY18. Revenue grew 34% over the year while operating earnings (EBIT) were up 50%. Guidance for FY19 is for Australian operations to be in line with FY18 and North America to grow by more than 20%.
UBS finds FY19 guidance, which implies operating earnings (EBITDA) growth of 9%, is erring on the conservative side. Within Australia, growth ex property is expected to be more than 8% as infrastructure & roads activity accelerate to meet slowing housing demand.
The broker continues to believe the business is a candidate for a re-rating as the risks of integrating Headwaters recede. Upgrades to North American synergies should help calm investor nerves, which have been heightened in recent months following challenges in the roofing and fly ash businesses. The broker believes the stock presents a good medium-term opportunity.
Citi also suspects FY19 guidance could prove conservative, given favourable market and weather conditions but believes the shares have returned to fair value and maintains a Neutral rating. Assuming no repeat of the FY18 weather costs and integration issues, and amid confidence in the synergies in North America, CLSA considers guidance feasible.
Credit Suisse calibrates forecasts consistent with company guidance with the exception of North America, where estimates are tweaked lower. If guidance is achieved this would still be considered positive, given the company's track record. The broker increases FY19 forecasts by 4% because of increased concrete and asphalt prices.
Morgan Stanley is pleased with the outlook and believes the business is well-positioned to leverage the strong construction markets in Australia and the US as well as the growth story in fly ash. For the first time in a number of years increases in prices offset cost inflation and management appears more positive on the pricing outlook than it has done for some time. The business appears positioned to benefit from the housing construction and emerging infrastructure boom.
USG JV
Macquarie was not so impressed with the North American segment and the USG joint venture was also weaker than expected, although the broker acknowledges one-off costs and operating issues dented the result.
Boral has now commenced negotiations in relation to its JV with USG, given the recent merger agreement between USG and Knauf, to either buy out the stake or evaluate an expanded option involving other plasterboard operators.
Whatever the outcome, Boral will seek to fund its option through a combination of portfolio optimisation and debt. Macquarie suggests, after the sale of Denver Construction Materials, this is now easier to achieve.
Management has stressed there is no longer a "technology deficit" when it comes to USG, previously a significant concern for investors. Boral has confirmed that it has increased its understanding of USG technology and the business, even with a buy-out of USG, would have exclusive rights to core technologies until 2024.
Hence, brokers suggests the market is now more confident that there will be a limited impact from any possible loss of technologies, instead focusing on how Boral might pay for the asset. UBS expects Boral to update the market in the December quarter and believes the buy-out of the JV is likely, with the main hurdles being the structure and price.
Fly Ash
Management expects strong price and margin growth and fly ash sales to rise by 25%, raising synergy targets by 15%. The company has outlined plans to source an additional 2-3 mtpa in fly ash over the next three years. Prices for fly ash also appear to be breaking away from cement prices, Boral points out, a sign that demand remains strong.
Credit Suisse warns the increased conviction and re-basing of expectations should be weighed against delivery by the company on its targets. The target for a 1.5-2.0mt increase in saleable ash over three years equates to 4.5-6.0% compound growth, which underpins expectations to grow volumes at least in line with cement, which is currently growing at 3-5%.
The challenges that weighed on this division earlier this year appear to UBS to be diminishing, because of increased capacity and network optimisation. Fly ash imports into the US are also increasing so UBS suspects there is an ample appetite for this product. Hence, the question arises as to why there is so much saleable fly ash not being sold, and the broker will try to find answers on the US tour in September.
CLSA asserts the problems with fly ash, where replacement tonnage from the network was not acquired quickly enough in the second half, seem largely resolved for the first half of FY19. The broker, not one of the eight monitored daily on the FNArena database, has a Buy rating and $8.54 target.
New contracts, additional storage, and the start of the first ash reclamation project should add to volumes in FY19, Morgan Stanley suggests. The broker is positive about this business and envisages a structural growth story supported by both higher prices and volumes.
FNArena's database shows four Buy ratings, two Hold and one Sell (Credit Suisse). The consensus target is $7.49, indicating 2.4% upside to the last share price. Targets range from $6.40 (Credit Suisse) to $8.05 (Macquarie).
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