Treasure Chest | Feb 12 2021
This story features BORAL LIMITED. For more info SHARE ANALYSIS: BLD
FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Upside for Boral hinges on a successful outcome of the transformation program and not all brokers are enamoured by the details so far
-Cost reductions stemming from logistics, procurement and labour
-Australian outlook a dampener on the second half
-Macro conditions supporting the US building products sale process
By Eva Brocklehurst
Boral ((BLD)) has slowly started to leverage an improving macro environment, although the benefits are more likely to become apparent in FY22. Upside, brokers believe, hinges on cost reductions and a successful transformation program.
Morgan Stanley has greater confidence in Boral after management further clarified its $300m transformation target. Importantly, the $170-190m in benefits identified for the current year exclude any reversal of prior one-offs. Cost reductions will fall into three categories: logistics, procurement and labour. Revenue initiatives are also part of the target.
Citi notes there are also no details on targets beyond the $170-190m and earnings leverage from cost reduction programs has been mixed for Boral in the past. Ord Minnett attributes the underperformance of the stock post the first half results to the very cautious commentary stemming from management regarding the outlook in Australia.
The broker is sceptical about the transformation target as it seems to be centred on aspirations for a return on funds equivalent to the weighted average cost of capital at the bottom of the cycle rather than sustainable performance improvements.
In other words, as UBS points out, the $300m target is an earnings shortfall that is required to get returns on funds employed to above 10%. While this knowledge is not new, the broker suspects the broking community and the market were anticipating greater detail on how the shortfall will be recovered.
This relative lack of detail, together with weak outlook for key operations, explains why the share price has declined, although UBS considers the business is moving in the right direction, albeit gradually.
While agreeing that delivering value through the cycle will be appreciated by investors, Ord Minnett asserts there should be more impetus from individual work streams and initiatives and Credit Suisse agrees the target would be more meaningful if it was based on hard "bottom-up" estimates and there were details of the measures to improve profitability.
Morgan Stanley has endeavoured to derive clarification regarding a "bottom-up" approach to the target and notes management is confident in "a variety of incremental projects". The transformation target contributes to Morgan Stanley's Overweight rating along with the US asset sales, support from a macro recovery and capital management.
Morgan Stanley retains some conservativism in its outlook regarding stimulus and infrastructure expenditure in Australia in the second half, as underlying conditions are acknowledged to be difficult.
Australian earnings (EBIT) decreased by -20% in the half-year. The company has pointed out that underlying conditions are uncertain because of continued weakness in multi-residential and commercial building.
Major projects have relatively lower intensity at present while new ones have been slow to move into the execution phase. This is such that, as Citi points out, much of the transformation benefit could be offset in the second half.
The broker acknowledges sentiment has improved, although Boral is yet to experience leverage to improved conditions amid an overweight exposure to the NSW apartment market and anticipates more substantial sales growth from FY22.
North American earnings increased by 31% in the half. Building products are expected to benefit from price increases that were announced late in 2020, while fly ash continues to be affected by a pandemic-related slowdown at utilities and the loss of a high margin contract in October.
Meanwhile, the sale process for US building products has commenced as the conditions such as housing growth and strong prices are supportive. Management prefers a sale of the business in its entirety rather than a break-up.
Morgan Stanley believes all this is pointing to capital management by the end of the year, deducing that, at this stage, M&A is not a priority.
Citi notes the balance sheet has improved and there is potential for around $1bn in surplus capital once proceeds from the asset sales are obtained. The broker anticipates an on-market share buyback is more likely, given there is only a small franking credit balances.
Credit Suisse cautions that forecasting second half earnings is difficult given the divergence between the improvement in North American margins and the contraction in Australian margins.
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