Treasure Chest: Boral Sale Adds Complexity

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FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Boral will sell its North American building products business, ex fly ash, adding complexity in the face of the offer from Seven Group

-Several unknowns for the balance sheet with this latest sale
-Substantial funds available for shareholder returns
-Can Boral achieve its full transformation benefit target?
 

By Eva Brocklehurst

Valuing Boral ((BLD)) has become more complex, as the company has agreed to sell its North American building products business to Westlake Chemical for US$2.15bn. Profit from the sale was not disclosed but should be confirmed at the FY21 result on August 24, 2021.

Citi notes the US housing market has exceeded FY19 levels to date and there is a high level of correlation between the underlying performance of light building product margins and the macro building environment.

The broker calculates the sale represents an enterprise value/operating earnings (EBITDA) multiple of around 12x and transaction multiples for similar businesses in the US have averaged around 10x. This compares with the pre-synergies payment Boral made for the Headwaters business, which included fly ash, of 10.6x EV/EBITDA.

The company continues to operate the fly ash business and has flagged the potential for a joint venture, strategic alliance or divestment. Citi assesses the next catalyst will be the FY21 result in August, or earlier should a decision be made about fly ash. The sale of the building products segment implies a valuation for Morgan Stanley of around 4x EBITDA for fly ash in its valuation.

There are several unknowns JPMorgan points to with this latest sale, including the tax rate Boral will incur after the divestment, the degree of stranded costs and the actual split of North American earnings between building products and fly ash.

Capital Management

Net debt has been revised down to $1.3bn which implies up to $$3.56bn in shareholder returns may be available. The method Boral will use to distribute funds remains debatable and will depend on a number of factors at the time the sale is completed, Citi suggests.

The broker notes the core domestic business has not lacked reinvestment in recent years and the group has minimal franking credits. Citi has suspended its rating and target as it is acting as adviser to Boral on the announced off-market offer from Seven Group ((SVW)).

JPMorgan upgrades to Neutral from Underweight as its valuation has increased and notes the potential for Seven Group to raise its bid for Boral from $6.50 a share. Credit Suisse has also flagged the independent expert report, which valued Boral around 15% above consensus and stated it expects Australian earnings (EBIT) to return to FY19 levels by FY23 and Australian EBITDA to be 55% of the group.

The Transformation Benefits

Earlier this month, Boral provided underlying earnings guidance for FY21 of $340-450m and provided some more detail regarding the target of $300m in transformation benefits.

In modelling the transformation benefits for the first time Credit Suisse forecasts relatively flat underlying earnings for FY21 despite attributing net transformation benefits of $75m and $85m from prior period one-offs attributed by prior management. The broker models a further 50% of targeted net benefits of $60-75m in FY22 and incorporates zero of the remainder in forecasts beyond that year.

JPMorgan is not yet prepared for an Overweight recommendation as the valuation does not appear particularly stretched, and remains sceptical about management's transformation target.

The broker expects EBIT of $205m in FY21 for Australia, ex property, including $125m in gross benefits ($75m net). This implies underlying EBIT of just $80m and compares to the last trough cycle earnings of $230m in FY12.

JPMorgan does anticipate earnings will grow in the years ahead as demand normalises but remains dubious that management can deliver all the benefits from the transformation plan in the Australian division. JPMorgan, white labelled by Ord Minnett on the FNArena database, has a $6.70 target.

The database has two Buy and two Hold ratings. The consensus target is $6.58, signalling -6.6% downside to the last share price.

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