Hot on the heels of the USD 2.15 billion (AUD 2.9 billion) sale of its North American building products division, Boral has offloaded its Australian timber business for AUD 65 million and anticipates further proceeds of USD 125 million (AUD 170 million) for the Meridian Brick divestment.

The surviving Australia segment, which accounted for approximately 60% of group earnings prior to sell-downs, consists of construction materials and cement, and the building products business units. The construction materials and cement business unit comprise quarries, asphalt, transport, landfill, property, cement and concrete placing activities. This business unit represents around 90% of Australia earnings and has the greater competitive strengths, though not sufficient to drive a moat overall. Building products, meanwhile, includes West Coast bricks, roofing, masonry and timber products and represents the remaining 10% of segment EBIT. These businesses are the less moaty.

Financial Strength:

The fair value of Boral Ltd has been maintained by the analysts at AUD 7.40. 

Since Seven Group (which holds 59.2% stakes in Boral) closed its AUD 7.40 takeover offer in July 2021, Boral shares drifted off to a low of AUD 5.80 in September, before staging a modest recovery to the current circa AUD 6.20. The fair value estimate of the analysts equates to a 2026 EV/EBITDA multiple of 6.7, a P/E of 14.5, and dividend yield of 4.8%.

Boral’s balance sheet is now flush with cash and a return of capital a near certainty in fiscal 2022. Prior to asset sale receipts, the company ended fiscal 2021 with AUD 900 million in net debt, excluding operating leases. But with cash from asset sales it expects to be in a position to return up to AUD 3 billion or AUD 2.70 per share of surplus capital by way of an equal capital reduction, subject to shareholder approval at the AGM on Oct. 28, 2021 and subject to an appropriate class ruling from the Australian Tax Office.

Company Profile:

Boral is Australia’s largest construction materials and building supplier, with an expanding footprint in U.S. fly ash and building products markets, and exposure to Asian construction materials markets via a joint venture with USG Corp. Previously operating as a conglomerate, Boral now exists as a pure-play, construction materials and building products group following the demerger of the group’s energy business, Origin Energy, in 2000. In Australia, the company is an integrated construction materials player, while operating fly ash and building products businesses in the U.S. The company’s joint venture, USG Boral, is a gypsum-based building product manufacturer and distributor in Australia, Asia and the Middle East. Boral formed the JV with USG Corp in 2014.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Successive acquisitions have seen the company become Australia’s fourth largest concrete and aggregates player. However, Adbri currently lacks full vertical integration in key Victorian and Queensland construction materials markets. This has left the group with an inability to fully benefit from demand from major infrastructure projects in these markets, and left Adbri’s earnings susceptible to falling demand from residential construction through the current Australian housing construction downturn, which began in late 2018. 

Acquisitions within these markets are therefore viewed positively, and with an improved ability to supply infrastructure projects in all major metro markets, the resilience of Adbri’s earnings in the next cycle will be strengthened.

There are concerns regarding the recent loss of the Alcoa lime supply contract highlights Adbri’s intention to allocate growth capital to its lime business. Competition from lime imports has proved too strong with Alcoa-the largest lime buyer in the Western Australia, or WA, market–to source lime offshore from 2021. A reassessment of the lime growth strategy is required, in our view.

Financial Strength 

The balance sheet remains in decent shape. It is anticipated that pressure on Adbri’s balance sheet will build near-term, owing to the AUD 200 million of capital expenditure over the 2021–2022 period associated with the previously announced Kwinana upgrade project. We expect leverage(defined as net debt including lease liabilities/EBITDA)to peak at 2.4 times in 2022, remaining below Adbri’s leverage covenant of 3.0 times. We anticipate balance sheet metrics will improve from 2023 onward as the cyclical recovery in new home construction and Adbri’s earnings gathers pace. An AUD 5.5 cent interim dividend was announced. We continue to forecast full-year 2021 dividends of AUD 0.12 per share reflecting an approximate 75% payout of net income. Adbri’s has ample liquidity to support operations through the medium term. 

Bulls Say 

• Infrastructure spending will offset declining residential construction activity and provide top-line growth. 
• A conservative balance sheet provides capacity for continued downstream acquisitions promising better returns. 
• The eventual turning of the housing cycle will support price increases in coming years.

Company Profile

Formed by the merger of S.A. Portland Cement and Adelaide Cement in 1971, Adbri is an integrated cement, lime, concrete and aggregates, and concrete products business. Adbri currently sells about 3 million metric tons of cement and 1 million metric tons of lime per year, making it Australia’s largest lime and second-largest cement supplier. Key geographic regions include Western Australia and South Australia with a focus on residential construction, infrastructure, and industrial markets including mining.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.