Boral disclosed that financial irregularities in its NAM Windows business will result in a US$20-30m EBITDA hit to its FY20 earnings. The announcement will weigh on Boral’s share price and we expect resistance to build at $5.00.
Boral has been under Algo Engine sell conditions since forming a lower high at $5.75 back in July.
The share price is now down 30% from the July high and much of this selling occurred yesterday following the FY19 earnings result. Underlying NPAT was down 7%, at $440m & EBITDA was down 2%, at $1,037m.
A pick up in US housing and local infrastructure spending should help to underpin Boral’s earnings. The stock trades on 10x earnings and a forward yield of 5%.
Boral, James Hardie Industries and CSR have rallied from oversold levels, as buyers have been attracted to the reduced PE multiples. The question is whether non-residential and engineering construction will offset the fall in residential construction volumes.
Australian housing approvals have been trending down for the past 6 months with Jan approvals of 172k, down 30% on the same time last year.
BLD, JHX and CSR are now under Algo Engine sell conditions and we remain cautious given the broader market index back drop.
We consider Boral as the best recovery opportunity, but expect short-term sell pressure to persist.
Reports about the health of the Aussie housing market vary depending on who is writing them; the RBA is suggesting the market is softening as household debt increases, while real estate agents look to foreign buyers to support higher prices.
Within this mix we have seen building stocks rally hard and are now beginning to look overbought.
Of the three major companies, CSR, JHX and BLD, our ALGO engine has triggered a sell signal on both CSR and JHX.
The internal momentum indicators on all three of these names are in extreme valuation ranges and and near their 52-week highs.
We believe it’s reasonable to expect a pullback from current levels and look for downside targets of $17.75 in JHX, $4.30 in CSR and $6.50 in BLD.