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$5.7 billion.
What are the recent developments in Boral’s operations?
Yesterday (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. While the investigation is ongoing, the irregularities appear to relate to the period between September 2018 and October 2019. The result of these financial irregularities has caused Boral to incur a loss of around US$20 million to US$30 million (before interest, tax, depreciation and amortisation).
On 6 November 2019 the Board held their AGM. The key points are as follows:
- Market conditions across several regions presented strong challenges.
- In Australia, housing starts were down 15% and the value of work done in roads, highways, bridges and subdivisions was down by an estimated 6%.
- US housing starts were down 2%.
- South Korea (Boral’s second largest market) in the USG Boral joint venture, residential construction is in a cyclical downturn.
- Despite these challenges, Boral reported a 4% increase in revenue and a 2% increase in EBITDA.
- Boral’s Net Profit after Tax (NPAT) is $440 million (before significant items), 7% lower than the prior year.
- Boral paid a 13.5 cent final dividend, taking the full year dividend to 26.5 cents per share, in line with the previous year.
What is the outlook for Boral?
The short-term outlook for Boral in FY20 is not exciting. Boral’s management noted at its AGM on 6 November 2019 that they expect NPAT (before significant items) to be around 5 to 15% lower in FY20 relative to FY19. It is also noted that Boral expects EBITDA in the first half of the year to be around 5% lower than the prior year. The loss from the American Window business is not factored into this guidance provided on 6 November 2019.
Regarding Boral Australia, it is important to note that total gross fixed capital formation (or investment expenditure) fell 0.2% (seasonally adjusted) in the September quarter 2019 and fell 3.8% annually (according to the national accounts). This fall in private investment was partially offset by an increase in public investment of 1.9% (seasonally adjusted) for the September quarter and 0.2% (seasonally adjusted) annually. With the Australian government 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.
What is the market reaction?
The market reaction to Boral’s announcement surrounding financial irregularities is negative. Boral’s share price is down 6.5% and is currently trading at A$4.60. Boral has a forward P/E ratio in the low-teens and a dividend yield of 5.4% (partially franked).
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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