Difficult FY21 Ahead For Boral

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Depressed building activity heading into FY21 makes it hard to assess the earnings outlook for Boral, despite the company shoring up its balance sheet.

-Building environment expected to deteriorate further
-Liquidity improved but capital raising not out of the picture
-No clarity on the outlook for building activity
 

By Eva Brocklehurst

Demand for building materials has slowed and impacted Boral's ((BLD)) businesses, with several brokers assessing the outlook for building activity is, at the very least, subdued. Clearly, UBS suggests, the impact of bushfires in Australia and plant closures in both Australia and the US have had a greater impact than previously anticipated.

Moreover, the Australian impacts are hard to quantify, Morgan Stanley asserts. Concrete volumes appear to be the largest contributor to the revenue decline but it remains difficult to reconcile the impact with earnings, and this in turn makes it hard to assess the FY21 outlook.

Boral's revenue was down -6% year-on-year for the four months to April, concrete volumes were down -16% and fly ash volumes down -8%. UBS agrees FY21 looks like enduring an earnings hole, although the issues that plagued the company over the second half of FY20, such as plant closures, are unlikely to recur. UBS expects FY21 Australian revenue will fall -10%.

Still, the impact on operating earnings (EBITDA) is even more significant and Ord Minnett calculates a decline of -40-50% occurred during the four months, which is surprising given management's $80m cost savings target for FY20.

On this subject, Citi highlights the fixed nature of costs for Boral and the degree of operating leverage. US operating costs were down just -2% compared with a -5% drop in North American revenue.

Supply constraints have outweighed reduced demand, UBS points out, as price growth held at 10%, and the main disappointment is the operating earnings margins, as each division has experienced a -3-5% fall, half on half.

While restrictions are likely to unwind in coming weeks, even with a weak level of activity, the broker calculates FY21 first half margins should be higher than the second half of FY20, albeit lower than the prior corresponding half.

Margin trends were also well short of Ord Minnett's expectations. The broker struggles to become more positive on the stock, given the demand environment is likely to deteriorate further. Citi is also expecting a further deterioration in demand.

North America

Boral remains cautious, noting the pipeline of work is diminishing and there is not yet a bounce-back as some US home builders are asserting. Disruptions have occurred across 70% of the company's plants in North America. Roofing and stone production in the US declined -14% and -29%, respectively.

Ord Minnett assesses uncertainty is particularly heightened for North America, highlighting that, since the Headwaters acquisition was completed, Boral has consistently lowered earnings forecasts for this division.

Boral may have improved liquidity, but UBS notes the market remains wary of US write-downs and the capital raising potential.

Balance Sheet

Liquidity has increased to $1.3bn. Debt facilities include a new US$200m issuance and approval for a new $365m bilateral bank loan. While the balance sheet measures make sense, Morgan Stanley is not convinced that additional debt is the answer and expects an equity injection at some point.

Hence, the broker does not envisage a compelling risk/reward trade in the stock. There is no clarity on the duration of the pandemic or the future leadership of the organisation, another reason why Morgan Stanley believes it prudent to bolster the balance sheet with equity at some point in time.

Citi notes liquidity is up just 14% since December, yet believes the willingness of banks to increased debt facilities is supportive. The company has highlighted the fact covenants are not based on earnings, so pressure on the balance sheet is not significant.

Citi broker, too, suspects the likelihood of an equity raising and believes, while the company would no doubt prefer to trade through the situation with additional debt, the magnitude of the operating leverage poses a risk.

Citi assigns a High Risk to its Buy rating, given the measures put in place as a result of the pandemic. The main investment risk is materially linked to any deterioration in the leading indicators for housing, or any cancellation of infrastructure projects.

FNArena's database has three Buy ratings and two Hold. The consensus target is $3.23, suggesting 30.2% upside to the last share price. The dividend yield on FY20 and FY21 forecasts is 5.3% and 4.2% respectively.

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