Boral Oversold, Although Headwinds Remain

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Despite marginally softer FY19 guidance from Boral, brokers believe the sell-off in the shares has been overdone and the outlook for the various business divisions is still fairly robust.

-Reiterates an intention not to raise equity, or sell assets if possible
-Guidance for 20% growth, or more, reaffirmed for North America
-Slight downgrade to guidance at odds with slump in share price
 

By Eva Brocklehurst

Boral ((BLD)) has sold off sharply in recent weeks, concerns stemming from the moderating US housing cycle and weather disruptions amid fears of a potential call on capital.

Yet the company has reaffirmed FY19 guidance at its AGM and believes demand remains robust, although UBS points out this is not the language of the company's peers. Boral has also reiterated a preference to fund a possible acquisition of the USG stake via asset sales and debt.

Trading over FY19 has been affected by delays and wet weather and these setbacks need to be overcome. Macquarie assumes growth will be below guidance in each of the company's segments with an increased skew to the second half likely.

Boral has maintained assumptions for FY19 but Macquarie is factoring in slower growth in housing starts and infrastructure, while being in line with the company's estimates on renovations and non-residential construction.

Macquarie observes the stock has aggressively de-rated and the market is seemingly ignoring the fact that around 50% of revenue is not exposed to either the US or Australian housing markets and valuation of the stock has reached levels not seen in the last decade. Hence, Citi and Credit Suisse upgrade, to Buy and Neutral respectively. Citi believes the sell-off is truly overdone.

Although FY19 guidance is largely unchanged, Deutsche Bank acknowledges a strong second half will be a stretch, particularly in Australia where projects have been delayed and operations are already running at pace.

While trimming its Australian, ex property, earnings to "high single digit" growth from "high single digit or more", Boral has also reaffirmed guidance for "20% growth or more" from North America, even after adjusting for the sale of its blocks business. The company has also pointed to US housing starts being up 5-6% over the year to date, although highlights the current cycle is one of the slowest recoveries since World War II.

Headwinds Continue

Despite unchanged guidance for the US, Credit Suisse believes the task is growing more difficult, while the apparent opportunity in the Australian business is still strong. This is the second “adverse weather year” in succession, the broker points out, and the second half is contingent on a turnaround. As a result, guidance should be considered of lower quality and higher risk, in the broker's opinion.

Morgan Stanley agrees events will need to fall in the company's favour to meet expectations in the second half. Still the slight downgrade to the outlook is at odds with the significant slump in the share price and the broker reiterates an Overweight rating. The company will be looking to make up any shortfall in earnings from the first quarter via cost reductions and productivity initiatives.

Price increases and acquisition synergies (Headwaters) are on track and Boral still expects price growth for most products, and margins to improve or stay steady. Deutsche Bank is confident Boral can gain traction on prices and believes earnings will recover. UBS notes, on fly ash, the landfill reclaim is now operating and the company has also started to import fly ash, although challenges regarding delivery are increasing.

USG JV

Boral is evaluating options associated with the USG JV, expecting to establish fair value for the 50% stake by early 2019. The company has reiterated an intention not to raise equity and does not wish to pursue the sale of more assets, if at all possible. Yet UBS points out, despite the divestment of the blocks business, Boral remains highly geared since the acquisition of Headwaters.

UBS suspects the market over recent days was attempting to pre-empt an earnings downgrade at the AGM and should take comfort in the latest update. Still, a slowing housing market and expectations a move will be made to acquire the USG stake are likely to keep downward pressure on the stock.

FNArena's database shows five Buy ratings and two Hold. The consensus target is $7.12, signalling 26.8% upside to the last share price. This compares with $7.54 ahead of the AGM. Targets range from $5.80 (Credit Suisse) to $8.00 (Morgan Stanley). The dividend yield on FY19 and FY20 forecasts is 5.0% and 5.6% respectively.

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