Treasure Chest: Boral To Prove Sceptics Wrong?

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FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Analysts at Goldman Sachs initiate coverage on Boral and suggest a significant turnaround is underway.

By Mark Woodruff

Whose Idea Is It?

Analysts at Goldman Sachs

The subject:

New research by Goldman Sachs suggests a significant turnaround is underway at Boral ((BLD)), and the pricing backdrop should remain supportive.

The broker initiates coverage on the building products and construction material group with a Neutral rating and $4.00 price target, well above the $3.49 average of the five brokers monitored daily by FNArena.

Ratings from these five brokers consist of three Hold (or equivalent) and two Sell recommendations.

Analysis by Goldman Sachs seems to agree with others that a significant uplift in profitability is already reflected in today's share price of around $3.60, but Goldman Sachs anticipates strong growth for Boral’s largest (50%) exposure to infrastructure construction, which should offset FY23/24 weakness in other sectors.

Exposure to roads, highways, subdivisions and bridges (RHS&B) represents 85-90% of Boral's infrastructure exposure. New residential construction, which the broker considers has the most challenged medium-term outlook, only accounts for around 19% of group revenue.

Key risks to Goldman’s view, on the broker's own admission, include weaker or stronger outcomes than forecast for volumes, cost inflation and actual price realisation.

In comments made following Boral's first half results in February, Jarden expected slower demand in FY24, despite evidence of pricing discipline coming back to Australian concrete/cement products in the current inflationary environment.

Jarden analysts believed competitors may need to focus on maintaining market share in a high fixed cost industry.

Despite holding these views, Overweight-rated Jarden, which like Goldman Sachs is outside FNArena's core database, has the highest rating and target ($4.10) of brokers mentioned in this article.

More info:

Just over a week ago, Ord Minnett suggested any pricing growth outside of input cost increases will be a challenge, and lowered its target price for Boral to $3.60 from $4.00. Similar to Goldman Sachs, Ord Minnett did forecast an improvement for construction materials earnings.

Back in early February, brokers in the FNArena database raised the average target price for Boral to $3.73 from $3.08 after first half results exceeded consensus expectations.

An unperturbed Morgan Stanley at the time observed ongoing cost pressures and maintained an Underweight stance as the company is required to raise pricing to combat cost inflation.

Macquarie (Neutral) also cautioned inflation pressures and risks remained, despite a solid volume outcome in the first half. Commentary by management noted second-order effects of strong commodity inflation in 2022 for many key inputs.

More positively, both Macquarie and UBS (Neutral) pointed to pricing traction in the first half. The latter suggested a firmer price footing was implied by 12% year-on-year net revenue growth and more than 4% volume growth for the period.

Less sanguine Citi (Sell) was left unsure after the result as to whether price was recovering inflation impacts.

Goldman Sachs is now more confident than Citi was at the time, and believes Boral will execute on price discipline (with price greater than cost inflation) and cost-out to ultimately realise a substantial improvement in margins, and therefore, strong earnings growth.

This broker anticipates cost inflation of 2.9% per year over FY23 to FY26, moderately below the 3.4% price increases realised by Boral.

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