BLD on a pro forma basis is expected to have net debt of less than $400m

Investment Thesis

Near-term outlook remains uncertain in Australia with higher costs and supply chain constraints.
BLD is a much cleaner business operations following several divestments, which increased focus.
Boral is expected to benefit from proposed infrastructure projects.
Better realization of price increases, whilst volumes remain solid.
Focused on the Australian market.
Proceeds from divestments could be returned to shareholders.
Large cornerstone shareholder – Seven Group Holdings (owns approx. 70%) – may provide shareholder turnover stability

Key Risks

Increase Concentrated earnings, focused on just the Australian Construction market.
Indirect and direct effect of coronavirus on operations.
Potential delays to infrastructure assets leading to a volume gap in the market.
Cost pressures continue to exceed price increases.
Unfavorable weather impacts.
BLD is now majority owned by Seven Group Holdings (approximately 70% of outstanding shares) which means minority shareholders’ interest may not always be a priority when making key strategic decisions around capital structure, shareholder returns and strategic initiatives

Key Highlights

BLD’s 1H22 results were impacted by Covid-19 related construction shutdowns and adverse wet weather. 1H22 revenue from continuing operations of $1.5bn was up +1% YoY driven by activity in detached house, A&A and RHS&B. However, operating earnings of $78m declined -23% YoY, with EBIT margin declining -100bps to 5.8%, due to $33m impact from Covid-19 lockdowns and expenses (energy + other costs). $22m from the cost out program (Transformation program) provided some offset. Maintain Neutral recommendation given the stock trades on a healthy forward PE-multiple of 24x, which we believe adequately reflects BLD’s leverage to the Australian infrastructure spend, further capital returns potential and cost outs supporting earnings (Transformation program). Further, BLD is now majority owned by Seven Group Holdings (approximately 70% of outstanding shares) which means minority shareholders’ interest may not always be a priority when making key strategic decisions around capital structure, shareholder returns and strategic initiatives.

1H22 results summary – continuing operations. (1) Revenue of $1.5bn was up +1% (or up +3% on a comparable basis), driven by activity in detached house, A&A (alterations & additions) and RHS&B (roads, highways, subdivisions & bridges) and despite there being disruptions from lockdowns. The Company did see solid volumes in concrete (up +1%) and quarries (up +4%). Further, management noted that concrete like-for-like prices were steady and up +2% in quarries. (2) Operating earnings (EBIT) of $78m were down -23% (with EBIT margin declining to 5.8% from 6.8%), which was largely driven by the impact from Covid-19 related construction shutdowns (which adversely impacted earnings by $33m) and expenses (energy + other costs). Partially providing some buffer to EBIT was higher volume (up $22m) and $22m from the cost out program (Transformation program), which includes the $24m of cost inflation. (3) Operating cash flow from operations of $86m was down -22%, reflecting lower EBITDA performance due to construction shutdowns
Capital return of $2.72 per share. Given the completion of disposal of BLD’s North American Building Products and Fly Ash, and Australian Building Products businesses (Timber and Roofing & Masonry) for more than $4bn, the Company will return $3bn surplus capital to shareholders via a $2.65 capital reduction and 7cps unfranked dividend.
Capital structure. Following the divestments of its non-core assets and expected capital return to shareholders, BLD on a pro forma basis is expected to have net debt of less than $400m. Management is targeting net debt of $900m to $1.1bn (including leases) and leverage (net debt / EBITDA) of 2 – 2.5x.
FY22 outlook comments. Management did not provide overly specific guidance but noted the following: (1) 2H22 revenue is expected to be above 1H22, driven by out-of-cycle national price increases effective Jan/Feb 2022. However, this is expected to offset the impact of higher energy costs, which will remain a headwind in 2H22. (2) No construction shutdowns in 2H22 ($33m impact in 1H22) are expected to be offset by typical 2H seasonality due to 6 fewer trading days.

Company Profile

Boral Ltd (BLD) is the largest integrated construction materials company in Australia, producing and selling a broad range of construction materials including quarry products, cement, concrete, asphalt and recycled materials. The Company has a portfolio of assets consisting of upstream and downstream assets. BLD employs approximately 10,300 employees and contractors and has 367 construction materials sites across Australia.

(Source: BanyanTree)

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