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.
Boral reported FY17 results that were inline with market expectations, with underlying EBIT of $460m NPAT of $343m. A final dividend of $0.12 per share (50% franked) was declared, taking the full-year dividend to $0.24, up 7% on FY16 and representing a payout ratio of 82%.
FY18 forward dividend yield, based on $0.26, is 3.5%.
The investment case for Boral is the strength of Australian infrastructure and US housing, however, the trends within the housing and construction stocks look less than favorable.
Prior to the market open on Friday, the US Commerce Department announced that Housing Starts fell fort a third straight month in May and has reached the lowest level of new home construction in eight months.
This development, along with a drop in Consumer Sentiment and Building permits, suggest that general construction has declined broadly during 2017 and could be a headwind to economic growth over the second quarter of the year.
This slowdown may have earnings implications for the US divisions of Boral and James Hardie.
The market remains optimistic about future earnings growth for Boral. The recent Headwater acquisition in the US provides Boral with added exposure to the US housing market. Domestically, Boral is well placed to benefit from the an increase in large scale infrastructure projects.
We feel some caution is warranted though, given the weaker trends emerging is both US and domestic housing construction data. The stock trades on 19x forward earnings and less than a 4% yield.
FY18 revenue is likely to be $5.8b, EBITDA $1.15b, Net Profit $490m and DPS of $0.29.
Boral has created a negative pricing structure following the stock making a lower low and then a lower high at $6.35 in last week’s trading.
With our general concerns around both domestic and US housing construction trends, combined with Boral’s high valuation and moderate underlying earnings growth, we think this is worth keeping on your “short signal” list.