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Boral Ltd – Impact Of COVID-19

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

Boral Ltd (ASX: BLD) is an international building products and construction materials company. Boral has three main divisions: (1) the materials business of Boral Australia (USG Boral); (2) the plasterboard joint venture in Asia, Australia and the middle East; and (3) Boral North America products and fly ash business. Boral has a market capitalisation of A$2.6 billion.

 

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Update on Coronavirus

The coronavirus (COVID-19) was first reported from the Wuhan province in China on 31 December 2019. The World Health Organisation data shows a total of confirmed cases of 334,981 and 14,652 deaths globally. As of today (24 March 2020), there have been over 1709 confirmed cases and 7 have died of COVID-19 in Australia.


What is the update on Boral’s Search share price?

Boral’s share price has dropped by around 64% over the last month. Boral is currently trading at A$1.70.

 

What is Boral’s COVID-19 response?

Boral announced that they are withdrawing its earnings guidance for FY20. There are several reasons for this announcement. Firstly, USG Boral is experiencing lower demand of Boral products, this is expected to continue and worsen. Boral also expects weakening demand to impact its other markets it operates in. Secondly, Boral expects economic conditions to worsen in the short term, and therefore cannot estimate FY20 earnings. Finally, Boral has been taking measures to limit the spread of COVID-19 on their work sites and are implementing plans to minimise the impact of Boral’s supply chain.

Regarding the USG Boral transaction with Knauf, Boral announced that the ACCC is unlikely to approve the call option in relation to the Australian and New Zealand business. As a result, Boral is now working on a range of potential options to continue the transaction moving forward.


What is the outlook for Boral?

Boral has faced several challengers over FY20. The major challenge Boral has faced in FY20 was regarding Boral’s North American Window Business. On 5 December 2019, Boral announced financial irregularities in Boral’s North American Window business involving misreporting including in relation to inventory levels, raw materials and labour costs at Boral’s window plants. The investigation found that pre-tax earnings were overstated by a total of US$24.4 million between March 2018 and October 2019.

Regarding the outlook for Boral Australia, it is important to note that total gross fixed capital formation (or investment expenditure) fell 1.0% (seasonally adjusted) in the December quarter 2019 and fell 1.8% annually (according to the national accounts). This fall in private investment was partially offset by an increase in public investment of 4.1% (seasonally adjusted) annually. With the Australian and state governments ramping up public investment in infrastructure projects, this could offset the losses in Boral’s revenue streams for a lack of private investment in construction beyond FY20.

In respect of Boral’s US operations, the recent depreciation of the Australian dollar will be of benefit to Boral’s US earnings in Australian dollar terms.

Investors that want exposure to the construction and materials industry could closely follow Boral in the coming months. Currently, Boral is very cheap and is trading at more than a 10 year-low.


 

Disclaimer:


This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.

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