Oz Infrastructure Going Great For Boral

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Boral has upgraded its FY18 Australian guidance and brokers suggest there could be further upside to come.

-Price momentum gaining traction and volume supported by demand from infrastructure
-Now a more diversified exposure because of the Headwaters acquisition
-Potential for re-rating as risks from Headwaters acquisition recede
 

By Eva Brocklehurst

Only several months into the new financial year and Boral ((BLD)) has already upgraded guidance for Australian building products, reinforcing a positive outlook. The company now expects “high single-digit” growth in operating earnings (EBIT), ex-property, in FY18, versus guidance that suggested around 5% previously. In Australia, fine weather and strong end-markets have helped the business and brokers expect there is further upside to come.

Morgan Stanley is one who would not be surprised if guidance is surpassed as the year progresses. Guidance for high single-digit growth in FY18 in the USG plasterboard joint venture was also maintained. Property division guidance for earnings to be at the lower end of the $8-46m historical range is unchanged.

Macquarie finds recent feedback from the industry signals price momentum is gaining traction while volume is underpinned by a strong infrastructure sector. Deutsche Bank found the upgraded guidance supported its expectations and, given it has taken place so early in the fiscal year, suggests a significant degree of confidence can be attributed to the numbers.

Moreover, the upgrade reinforces the idea that the infrastructure market in Australia, which represents the company's largest local end market and 36% of revenue, is buoyant.  Emphasising this feature, Morgan Stanley calculates that Australian new housing exposure accounts for less than 20% of Boral's revenues, with only 10% in the multi-residential category, where the greatest downside from a housing downturn is envisaged.

US division

In North America, Morgan Stanley found the message a little harder to decipher. Impacts are expected from Hurricane Harvey in Texas and Hurricane Irma in Florida in the first half. Nevertheless, rebuilding activity could offset this in the second half. Over coming years consistent earnings growth from Boral is still expected, based on the leverage to Australian infrastructure and further improvements in US construction.

Morgan Stanley envisages synergies from the Headwaters acquisition will combine as construction in Australian infrastructure gathers momentum. The broker reiterates that Headwaters was a company-transforming transaction and Boral is now a more diversified exposure in terms of both geography and product. The Headwaters acquisition added products with a more variable cost base and its leading position in fly ash has structural as well as cyclical upside.

US growth will be propelled by the inclusion of Headwaters, Macquarie agrees, which is being integrated in line with expectations. The broker notes guidance for year one synergies remains consistent with previous expectations and the impact of the hurricanes, stated at $5-10m, is also in line with earlier estimates.

Progressing the integration of Headwaters is key to reducing the overall risk to the stock and supporting the potential for re-rating, in Macquarie's view. Notwithstanding some impact from supply disruption in gypsum, this broker was also comforted by the unchanged guidance for USG Boral. Macquarie believes the stock is trading close to the lower end of its relative valuation range and, given the repositioning of the portfolio, there is potential for re-rating as Headwaters risks recede.

Morgan Stanley, too, notes that the stock is trading at a discount to both its valuation and the historical relative price/earnings trading range. It also compares favourably with the ASX200 industrials ex-financials and remains the broker's preferred industry exposure.

Taking on board the statements provided at the AGM and factoring in the upgrade, Ord Minnett finds little to change its view and sticks with a Hold rating. Deutsche Bank, on the other hand, remains happy with its expectations for 20% growth, ex-property, and continues to rate the stock a Buy because of the exposure to the growing US economy, the upside from Headwaters and the Australian infrastructure momentum.

FNArena's database shows five Buy ratings, one Hold (Ord Minnett) and one Sell (Citi, yet to comment on the AGM). The consensus target is $7.45, signalling 0.2% upside to the last share price. Targets range from $6.20 (Citi) to $8.50 (Morgan Stanley).
 

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