Boral’s latest trading update has more bad news for earnings. Wet weather through NSW and Queensland has continued to impact volumes, while inflation is running away with energy costs. Price rises can only limit the damage.
‘Exceptional rainfall’ has chipped a further $30 million from BLD’s FY22f EBIT. BLD’s trading update in late March had already indicated an impact from floods of $23 million which contributed to reduced guidance for FY22f EBIT of $145-155 million. But that guidance assumed no further ‘extraordinary’ rain events. The company now says that the soggy conditions have continued through to mid-May which has impacted volumes and costs.
The impact from external events has not been limited to flooding. Construction shutdowns related to COVID-19 was a $33 million drag on EBIT, but La Nina has been worse at $53 million, so far.
Rising coal, diesel, electricity, and gas prices are a greater headwind. The company does not provide any insight to its management of electricity and gas costs (amounts fixed and/or hedged) but we do know that it is completely unhedged for coal and diesel.
BLD’s FY21 cost base of $2.5 billion included energy costs at 5% or about $130 million. This was spread across diesel ($59 million), electricity (44 million), gas ($12 million) and coal ($14 million).
BLD now says that inflationary impacts from higher energy costs will reduce EBIT by a further $15 million relating to the late March to mid- May trading update period. These higher costs are also assumed to continue through to 30 June 2022.
BLD has been able to instigate some out-of-cycle product price increases in January and February, but these have been insufficient to offset the more recent higher energy costs.
The Transformation benefits will be $40-50 million in FY22f. This is below the targeted range of $60-75 million and perhaps suggests BLD is less in control of this than thought.
Investment view
Some sympathy is due for events beyond BLD’s control, but these are material hits to earnings, nonetheless.
The weather events are fairly obvious, but the more worrying aspect is the rising energy costs where we have almost no visibility.
The whole industry is in the same boat, but this does not alleviate the earnings pressure BLD is under, save for a couple of product price increases.
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 lowered our recommendation to Sell from Hold.
