Change of Analyst for Boral; Our FVE Decreased 9% but Shares Remain a Bargain

Business Strategy & Outlook

The broadly supportive of Boral’s strategy. Boral’s strategic priorities revolve around four key pillars. The first pillar is largely complete and involves refocusing Boral’s operations on its Australian construction materials business through divestments of noncore assets. Divestments include USG Boral, the North American building products and fly ash businesses, and Meridian Brick. Boral’s second strategic priority is its transformation program, which is aiming to add up to 250 million in annual EBIT to the Australian business net inflation. The third pillar involves decarbonizing Boral’s operations. The final pillar focuses on exploring and commercializing innovations over the long term. The Boral has divested noncore business units and is looking to remove inefficiencies from its Australian operations. Profitably decarbonizing Boral’s operations is likely to be a drawn-out effort but is appropriate give the increasing focus on environmental, social, and governance factors in investment appraisal.

The medium-term outlook for Boral is reasonably strong. Boral derives around two thirds of group revenue from infrastructure and nonresidential construction projects such as roads, highways, subdivisions, bridges, and commercial buildings. The remaining one third of revenue is largely from residential construction activity across detached housing, apartments, and renovations. Buoyed by relatively strong macroeconomic conditions and favorable monetary and fiscal policy, the pipeline of construction and building projects is healthy and should underpin solid demand for Boral’s construction materials.

However, Boral’s outlook is not free of challenges. The combination of a strong construction pipeline and limited migration of skilled workers during the coronavirus pandemic is expected to result in raw material and labour shortages. These headwinds have the potential to exacerbate cost pressures while increasing lead times for existing projects and/or halting projects altogether.

Financial Strengths

Boral’s balance sheet is in a strong position. Divestments of noncore operations including USG Boral, the North American building products and fly ash businesses, Meridian Brick, and Australian Timber, generated more than USD 4 billion in proceeds. Following AUD 3.1 billion in capital returns to shareholders throughout fiscal 2022, a modest net debt position of approximately AUD 200 million at year-end (including lease liabilities).

The Boral’s targeted level of leverage is manageable. In the longer term, Boral is seeking to maintain a net debt range of 2 times to 2.5 times EBITDA. An average dividend payout ratio of 70% over our forecast horizon, at the upper end of management’s 50%-70% target. The Boral will appropriately determine ordinary dividend payments subject to its financial position and broader construction market conditions.

Bulls Say

A strong pipeline of construction projects will stimulate demand for Boral’s construction materials over the medium term.

Boral’s transformation program will expand the profitability of the Australian operations and increase return on invested capital.

Boral’s divestments of noncore businesses leave management free to focus on generating value from the core Australian operations.

Company Description

Boral is an Australian vertically integrated building materials company with operations across quarries, cement, concrete, and asphalt. Having recently divested its noncore operations including its North American building products and fly ash businesses, USG Boral, and Meridian Brick, Boral’s operations are now focused on the Australian construction market.

(Source: Morningstar)

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