Company Reports

We increase our Boral fair value estimate by 9% to AUD 5.10 per share. Boral now unanimously recommends that shareholders accept Seven Group’s off-market takeover offer following an increase to the cash component. We consequently think it is highly likely that Seven’s bid will succeed—we are still recommending that Boral shareholders either accept or sell on-market.

Boral’s strategy and operating model focuses on three strategic priorities: operating efficiency in construction materials, maximizing value from the property portfolio, and the provision of more sustainable products. The first pillar aims to simplify the business by streamlining and investing in cement, aggregate quarries, recycling, concrete, and asphalt capabilities to enhance network efficiency, customer engagement, and efficiency.

We follow up with further details on no-moat Seven Group’s AUD 6.05-AUD 6.25 scrip bid for no-moat Boral. The industrial services and energy conglomerate is launching an off-market mop-up bid for the 28.4% of the construction materials specialist it doesn’t already own.

We increase our fair value estimate for no-moat Boral by 7% to AUD 4.70, assuming a 50% chance Seven Group successfully acquires the 28.4% of the company it doesn’t already own. We make no change to our AUD 30.50 fair value for no-moat Seven Group, with any dilutionary impacts likely to be offset by removing duplicated corporate costs and other synergies.

Boral’s strategy and operating model focuses on three strategic priorities: operating efficiency in construction materials, maximizing value from the property portfolio, and the provision of more sustainable products. The first pillar aims to simplify the business by streamlining and investing in cement, aggregate quarries, recycling, concrete, and asphalt capabilities to enhance network efficiency, customer engagement, and efficiency.

Boral’s strategy and operating model focuses on three strategic priorities: operating efficiency in construction materials, maximizing value from the property portfolio, and the provision of more sustainable products. The first pillar aims to simplify the business by streamlining and investing in cement, aggregate quarries, recycling, concrete, and asphalt capabilities to enhance network efficiency, customer engagement, and efficiency.

We increase our Boral fair value estimate by 4% to AUD 4.40 per share. In approximate equal measure, this reflects a stronger-than-expected first-half fiscal 2024 result and time value of money.

We make no change to our AUD 27.50 fair value estimate for no-moat Seven Group nor to our AUD 4.25 fair value estimate for no-moat Boral. Upgrades to fiscal 2024 earnings for both are positive, though we read no material long-term implications from the changes. Increasing demand for support activity across mining production, strong committed order books, and continued strength in infrastructure and construction feature in the upgrades. Our midcycle estimates, however, are little changed.

Boral’s strategy and operating model focuses on three strategic priorities: operating efficiency in construction materials, maximizing value from the property portfolio, and the provision of more sustainable products. The first pillar aims to simplify the business by streamlining and investing in cement, aggregate quarries, recycling, concrete, and asphalt capabilities to enhance network efficiency, customer engagement, and efficiency.

We reduce our fair value estimate for Boral by 3% to AUD 4.25 per share after transferring coverage to a new analyst. The modest downgrade for the vertically integrated construction materials company includes a slightly more tempered while still positive view on the construction cycle. We continue to rate Boral as no-moat, High fair value Uncertainty, and standard capital allocation.

We raise our fair value estimate for no-moat Boral by 22% to AUD 4.40 per share after fiscal 2023 results and a transfer of coverage to a new analyst. Our material upgrade reflects a number of changes, including a more optimistic view on the construction cycle. We previously factored in a significant medium-term construction downturn, but that now looks unlikely, particularly given Boral’s exposure to the resilient nonresidential and infrastructure markets. Solid population and GDP growth, supported by immigration, should underpin longer-term demand for the infrastructure, nonresidential, and housing markets. Nearly 70% of revenue is tied to infrastructure, engineering, and nonresidential projects, with the remainder nearly all driven by housing demand, both new and renovations.

We have lowered our full-year EBIT forecast for no-moat Boral’s continuing operations by 32% to AUD 150 million, sitting at the midpoint of management’s full-year guidance of between AUD 145 and AUD 155 million. Boral has been affected by a combination of extreme weather events across the Australian east coast and rising input costs. Heavy rainfall in New South Wales and Queensland disrupted production schedules and affected Boral’s ability to deliver products to customers. Further, rapid increases in coal and diesel prices are expected to more than offset Boral’s product price increases and hedging provisions over the remainder of fiscal 2022, crimping near-term profit margins.

We increase our fiscal 2022 EBIT forecast (inclusive of discontinued operations) by 54% to AUD 382 million for no-moat Boral following the release of half-year results. The rise largely relates to the accounting treatment of assets held for sale, which resulted in an AUD 110 million favourable depreciation variance versus the prior corresponding period, which was not previously captured in our forecast. With our adjustment being noncash, the impact to our AUD 4.70 per-share fair value estimate is negligible. We maintain our short- and long-term forecasts for the Australian construction materials business which, following a series of strategic asset sales in fiscal 2022, is expected to be the core of Boral in future. With our fair value estimate maintained, Boral shares screen at a 21% discount.

Boral has confirmed its future state as an Australia-focused construction materials player once again, having announced its fly ash business is now on the market. With the sale of the North American building products division announced in late fiscal 2021, the strategic slimming down of the group is nearing completion. We continue to be in favour of the significant slimming down and refocus that is underway, with Boral to retain and focus on its core, that is advantageous to the Australian construction materials franchise. Full-year fiscal 2021 operating income of AUD 421.00 million, inclusive of the final contribution profits from the USG Boral joint venture, which was divested in March 2021 and excluding one-time profits from property, tracked our expectations for the no-moat stock. While the top line was hampered by coronavirus disruptions to construction, EBIT from continuing operations rose as Boral delivered against its AUD 125.00 million cost-out target for the Boral Australia business. We make no change to our AUD 7.40 per-share fair value estimate. Shares in the no-moat stock trade at a 12% discount to our unchanged valuation.

Policymakers are increasingly cognizant of the significant contribution from the manufacturing processes, transport and disposal of building materials to the carbon-intensity of our built environment. Assessing the associated degree of carbon-risk associated with many building materials is a complex task—for detail, please see our special report “Combatting the Carbon Intensity of our Built Environment” dated July 27, 2021.

Following consideration of environmental, social and governance, or ESG, risks relevant to the construction materials industry, we make no change to our respective per-share fair value estimates of AUD 7.35 and AUD 3.15 for no-moat Boral and narrow-moat Adbri. Our medium uncertainty ratings for both stocks also remain unchanged. Carbon emissions represent the most significant ESG challenge to the industry, with cement and concrete production accounting for an approximate 5% of total global greenhouse gas, or GHG, emissions. This sobering statistic owes itself primarily to the ubiquitous use in the built environment, with extensive application found in the construction of residential and commercial buildings and in infrastructure. As a result, concrete is the most widely used architectural medium and the second-most consumed substance globally, after water. Despite the industry’s significant contribution to global GHG production, we expect concrete to remain omnipresent within the built environment into the future.

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.

The Australian Government’s targeted and highly effective fiscal support of the residential construction sector leads us to materially upgrade our near-term outlook for housing commencements and alteration and addition activity. Certainly, housing-related stocks under our coverage are set to benefit from the recovery in fiscal 2022, boosting earnings and improving balance sheet metrics. But with fiscal support for the sector now winding down, the valuation benefit of our upgraded near-term housing commencement forecasts to our housing-related coverage is modest at best.

Boral is Australia’s largest construction materials supplier. It is an integrated aggregate, cement and concrete player with AUD 3.1 billion construction materials sales in fiscal 2020. Following the acquisition of Headwaters Inc. in May 2017, Boral has is also the largest fly ash marketer in the U.S. with an approximate 50% market share and sales of USD 540 million in fiscal 2020. Boral's strategy is presently in flux, with new CEO Zlatko Todorcevski having joined the construction materials player in early July 2020. However, Todorcevski's initial review of Boral's portfolio of businesses has completed. A refocus on Boral's core Australian construction materials and U.S. fly ash marketing businesses seems the likely strategic direction for Boral under Todorcevksi.

New CEO Zlatko Todorcevksi made his vision of a markedly more profitable Boral more apparent to investors at Boral’s fiscal 2021 half-year result. Incremental detail was provided in regard of his evolving strategy to reinvigorate the beleaguered construction materials player. His strategy aims to deliver a marked improvement in through-the-cycle returns on invested capital, or ROICs, via the combination of a permanent reduction in the cost base of Boral’s existing businesses and the targeting of new earnings streams. Cost-out initiatives will focus on better coordination of raw materials procurement across the Boral group and a cost-reducing supply chain optimization program. New earnings streams are to be targeted via product innovation and from opportunities identified in adjacent building material product categories. Taken together, Boral aims to deliver an AUD 300 million uplift to group EBIT, net of inflation, via its cost-reduction programs and new earnings stream opportunities, with the express objective of driving prospective economic profit generation at all points of cycle. We are cautiously optimistic about the potential for the sustained improvement in Boral’s returns.