As the east coast floods recede, fuel costs are rising for Boral. The earnings hit from the weather impact will unwind in FY23, but the more insidious effects of rising fuel costs is not yet fully understood. BLD’s trading update and guidance statement now expects FY22 continuing operations EBIT (excluding property) to be between $145- 155 million, assuming no further extraordinary rain events.
The big downpour and flooding across NSW and Queensland has cost BLD approximately $23 million in earnings through production disruption and delivery issues. We see this impact as temporary and should unwind over FY23f.
BLD also noted sharp increases in fuel and coal prices to which it is exposed. The energy cost impact called out in 1H22 ($6 million net of hedging) is now expected to expand in 2H22, but there is little clarity on the company’s key contract terms with suppliers of coal and diesel. This makes it harder to know how much higher the fuel costs will be and for how long.
BLD said its exposure to coal prices is unhedged for 2H22f. Hedging is in place for most of its expected diesel usage to April 2022, with no further hedging after that. We make the observation that the average Newcastle coal price in FY21 of A$98/t is now A$266/t at spot rates. The diesel price based on the Singapore Gasoil index price, on which BLD hedges its diesel costs, has increased 140% between FY21 and the current spot price. The energy cost impact will also include higher electricity and gas prices (see Figure 2).
BLD will also be passing on some of the cost increases to customers, but the extent to which it is successful remains to be seen.
Investment view
At the peak of the cycle back in FY18, the Construction Material business produced EBIT above $350 million. We are close to the bottom for this business and expect it can once again reach $300 million by FY24f, but rising inflation is an additional factor to be managed.
The company still has about $500 million of surplus capital so it is financially sound, but operational challenges are increasing.
Risks to investment view
Rising cost pressures and on-going COVID issues (supply chain, labour, other restrictions) may hinder earnings recovery in Construction Materials. The Transformation program needs to deliver on its target but could be delayed if economic conditions deteriorate.
Recommendation
We have retained our Hold recommendation.
