Boral – Deep Sell Off

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 – Valuation Review

Boral shares offer further upside as they recover from oversold conditions.

Based on FY20 earnings we assume Boral will generate $6bn in revenue and grow net earnings by 8% to $570mn. This places Boral on a low PE multiple of 10x earnings.

We have the stock now trading on a 5.5% dividend yield.



Boral – Recovery Underway

Boral has been highlighted on the blog as a “high conviction” recovery play. The stock price has now rallied from $4.40 to $5.00.

Looking through any short term market weakness, we see a second half 2019 price target of $5.50 as achievable.

Boral – FY19 Trading Update

Boral has been under Algo Engine sell conditions since late 2017. The stock made a new low last month following the company downgrading FY19 earnings.

Weather and project delays were cited as the main reasons for earnings  coming in below prior forecasts.

With the share price falling from $8.00 in February 2018, to a low at $4.40 in March, value continues to stand out in historical terms.

Based on expected FY20 earnings, we have Error with ischart shortcode. No symbol attribute on 10x PE offering a 6% dividend yield.

Accumulating the stock throughout this year, will likely prove a long term  discounted entry level.





Housing Construction – Sell Signal

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.





Boral’s FY18 Results

Boral reported FY18 results which were ahead of market consensus , with net profits of $514 million.

North American guidance was a little weak, with one-off costs and
operational issues creating a drag on earnings, the market remains hopeful the risks on the Headwaters integration recedes.

Based on FY19 earnings growth of 12%, Boral now trades on a 3.8% forward yield. We remain cautious whilst the the lower high price formation and ALGO sell signal is in place.

Boral goes ex-div $0.14 on the 4th September.

Our preference in this sector remains CIM and DOW.


Building Stocks Approach Key Resistence Levels

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.

 James Hardie




Housing & Construction – BLD, JHX & CSR

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.


Weaker Housing Data Could Drag On US GDP

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.





Boral -FY18 Outlook

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.

Chart – BLD