Boral Shares Surge, Brokers Remain Cautious

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Despite consensus-beating earnings in the first half, brokers remain wary around pricing and costs for Boral.

-First half earnings for Boral beat consensus by 19%
-Average broker target price rises by 20% in the FNArena database
-FY23 guidance implies 5% upside to the consensus earnings forecast
-Brokers cautious on pricing and cost management
-Labour costs pose the biggest headwind

By Mark Woodruff

Shares in building products and construction material group Boral ((BLD)) have been climbing steadily since hitting a 52-week low of $2.48 last October. The current share price of $3.85 (at the time of writing) was further assisted by a 12.8% surge after the release of first half results yesterday.

The overall rise in share price has been somewhat validated by the six covering brokers in the FNArena database, with the average target price rising by 20% to $3.73.

The outlook is not all rosy, however, with Citi and Morgan Stanley retaining ratings of Sell and Underweight, respectively.

Credit Suisse maintains the highest rating in the database (Outperform), despite valuation concerns, given the analyst expects good operating conditions and earnings upgrades in the next six months.

Revenue of $1.7bn was a 6% beat compared to the consensus forecast and underlying profit of $57m exceeded a prior estimate by consensus for $37m. Earnings (EBIT) for the half of $95.3m also exceeded prior forecasts made by Credit Suisse and consensus by 49% and 19%, respectively.

Management guided to a second half earnings outcome in line with the first half, which implies to Morgan Stanley upside risk of 5% compared to the consensus forecast.

Moreover, the analysts at Credit Suisse expect upside to this guidance as margins should improve in the second half on lower energy costs, improved weather and modest growth in end-markets.

Outside the FNArena database,  Jarden is also upbeat on prospects for Boral and maintains its Overweight rating and raises its target to $4.10 from $3.60.

This broker attributes a stronger earnings margin (from pricing discipline and cost management) for a beat against its expectations for first half results.

Macquarie (Neutral) isn’t overly surprised industry price discipline improved, given the opposite in 2022, though still considers an 8% average selling price gain for Boral a solid outcome.

While further price increases in February are expected to drive double-digit year-on-year price growth in the second half, the broker points out price adjustments so far are only close to matching a surge in costs.

The company noted cost pressures were broad-based in the half, with second derivative increases in costs for transport, repairs and maintenance, and plant and equipment of 20%, 12% and 11%, respectively.

Management failed to declare an interim dividend, citing low free cash flow and a low franking balance. Jarden expects the board will outline its dividend policy and any other capital management initiatives alongside FY23 results, subject to cash flows and opportunities to reinvest in the business.

Pricing and costs

Management intends to reduce its exposure to fixed-price contracts and have more dynamic product pricing in future.

However, while there’s initial evidence of a return to pricing discipline for Australian concrete/cement products in the current inflationary environment, Jarden is wary of slowing demand in FY24 and the need by some competitors to maintain market share in a high fixed cost industry.

Meanwhile, UBS cautions on both pricing and cost management.

While Boral is being more active in improving industry attitudes to realised pricing it will take some to transform the industry structure, according to the broker, at a time when well-above-normal price increases are needed to offset cost inflation.

Energy costs appear to have peaked, though the analyst points out direct energy costs are only around 8% of Boral’s cash cost base.

Labour costs (circa 30% of the cash cost base) are the main near-term headwind and with industry shortages are unlikely to improve in 2023, suggests UBS.

Outlook

Providing further perspective, Ord Minnett bemoans the company's lack of durable competitive advantages in a crowded market, but still expects demand will remain steady as large infrastructure projects will replace future downside for residential construction.

Citi likes management’s renewed focus on productivity, a pickup in infrastructure and a slowing in the rate of change of inflation.

However, the analyst feels the stock has run well ahead of fundamentals and believes investors should wait for a better entry point. Even though current earnings are trending in the right direction, it’s thought a 40% premium to market multiples can only last so long.

Of the six covering brokers in FNArena database, one has a Buy rating (or equivalent) and there are three Hold and two Sell ratings.

The consensus target is $3.73, suggesting no upside.

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