Improved Visibility of Boral’s Transformation Plan Drives 16% FVE Lift but Shares Still Rich

More granular detail from Boral on its strategy to improve its through-the-cycle returns, combined with new information regarding surplus land holdings earmarked for eventual divestment, drive a 16% increase in our fair value estimate for the no-moat stock to AUD 5.90 per share. With Boral outlining its plans to realise supply chain efficiencies and other cost-out initiatives over the fiscal 2022 to fiscal 2026 period, we factor an incremental AUD 75 million in EBIT benefit accruing to the Boral Australia segment by fiscal 2023 year-end. Accordingly, we raise our midcycle group EBIT margin forecast by 1% to 11.5%, up from a coronavirus-impacted nadir of 6.7% in fiscal 2020. Embedded in its target statement--which responds to the current off-market takeover offer from no-moat Seven Group Holdings, or SGH, at AUD 6.50 per share--Boral provided a new estimate of the latent value that presently exists within its extensive property portfolio, which also contributes to our sizeable fair value estimate upgrade. While the SGH offer of AUD 6.50 per share screens attractively relative to our upwardly revised fair value estimate, we note Boral shares continue to trade at a premium to the SGH offer. Therefore, greater value can be realised via an on-market disposal of Boral shares at or near the last traded share price of AUD 6.83 per share than via acceptance of SGH’s off-market offer.