Boral Beats, Outlook Cautious

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Boral has posted a forecast-beating result but is also seen as well-priced ahead of a possible slowdown.

-Boral beats on earnings
-Double-digit margins achieved ahead of time
-Outlook nonetheless cautious
-Brokers cite overvaluation

By Greg Peel

Boral ((BLD)) posted a first half earnings result well ahead of consensus, delivering a double-digit margin 6-18 months ahead of market expectations. Growth was led by price realisation across all product lines, while sales volumes were generally flat to slightly higher year on year.

Notably, sales volumes for quarries posted a significant beat, but strong cost discipline and benefits from operational efficiencies drove margins. Brokers were surprised by flat labour costs year on year given reported shortages and wage pressures across the industry.

FY24 underlying earnings guidance has been upgraded to $330-350m from $300-330m set in November. Favourable half on half comparables from price hikes implemented during first half, and again in January, along with flat sales volumes guided for the second half, suggest to brokers the upgraded FY24 guidance is still conservative.

While the board decided not to declare a dividend, given a low franking credit balance, a fall in the gearing level to well below target suggests significant capacity to pursue organic growth and/or M&A. Brokers expect dividends to resume over time.

Jarden saw a clean, quality result, coming off a low base, which reflects the successful integration of the new strategy under new management, latent potential that has been sitting dormant at Boral for some time, and historically poor industry discipline. The broker is encouraged Boral is now working towards being a price leader as opposed to competing away returns which did not justify the quality of its upstream asset portfolio.

Taking a price leadership role suggests higher returns through the cycle are achievable, Jarden suggests, amid a strong demand outlook driven by population growth, significant engineering works and residential under-build.

The Outlook

Macquarie believes while the company’s operational improvement trajectory is stronger than expected, it continues to hold significant potential, even in the face of tepid volumes. The result supports the broker’s view the trajectory of turnaround is prone to underestimation.

Macquarie saw a strong result that points to Boral managing what it can well. Price discipline in the industry appears to be sustaining, while management executes on cost and efficiency gains. It confirms to the broker “inevitable” upside risk in a high-potential turnaround. On that basis, Macquarie retains its Outperform rating.

But Macquarie is looking lonely.

Management warned of a slowing residential market and risks around infrastructure delays. Despite volumes being up low-single digits in the first half, UBS remains cautious on the outlook given the operating leverage in the business and management’s strong efforts on costs so far.

UBS considers Boral “priced for perfection” and thus retains a Neutral rating, despite the fact the broker’s forecasts are above guidance for the second half and earnings growth is expected to continue into FY25.

Morgan Stanley notes over the last twelve months Boral has been aided by a buoyant residential construction market, elevated infrastructure spending, and even favourable weather. This broker sees these trends reversing in FY25 as the residential pipeline is exhausted and weak approvals data begin to be reflected in activity.

Morgan Stanley also notes an inflection point in Construction Work to be Done in the infrastructure space which potentially points to a moderation in that sector. The broker forecasts flat earnings in FY25 and could see downside risk to this if activity levels bite more than anticipated, which informs an Underweight rating.

Looking forward, volumes appear to Citi to have stopped growing, while pricing will begin to cycle elevated comparables. Given this, and an “extended” valuation, this broker too remains cautious. Citi does note upside risk remains if the industry has structurally changed, but for now retains a Sell rating.

Goldman Sachs has moved its earnings forecast to the top of the guidance range, representing a 12% uplift from prior forecasts. This broker continues to forecast broadly flat year on year volumes and 7% price appreciation. Sounds positive, but Goldman is sticking with Sell.

Jarden cites recent share price outperformance in downgrading to Neutral from Buy, while Bell Potter retains a similar Hold rating.

Target Increase

Among the six brokers monitored daily by FNArena and covering Boral, only Macquarie has a Buy or equivalent rating. Two brokers have Sell ratings and three have Hold, although one is Ord Minnett who is yet to update.

The consensus target has moved up to $5.33 from $4.90, but the range is wide. Excluding Ord Minnett’s un-updated $4.25, targets range from Morgan Stanley’s $4.30 to Macquarie’s $6.40. Still, Macquarie is not that much of a standout, with UBS on $6.20 and Bell Potter on $6.30.

Not monitored daily, Jarden has lifted its target to $5.80 from $5.35, and Goldman Sachs by 10% to $5.40.

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