The corporate activity that dominated Boral’s headlines over the last year has finally given way to simply getting on with the job. But BLD is now dominated by its Construction Materials business which has not failed to disappoint in recent years.
Since early 2020, as major infrastructure projects have rolled off and the multi-residential boom in NSW has quietened, BLD’s earnings have receded. But lead indicators of demand are beginning to point to a turnaround. Infrastructure work is expected to tick up in FY23f, non-residential approvals were up 12% in the year to December 2021, and multi-residential approvals have bounced off the bottom.
1H22 Construction Materials EBITDA of $202.2 million was a positive result considering the challenges posed by COVID and some severe wet weather. Rising energy costs clipped $6 million off the result in the period. Perhaps this is the first glimpse of better times ahead although higher inflation is lurking menacingly.
We think BLD needs to shift back towards its higher margin geographies (NSW) and for infrastructure projects to kick back into gear. This remains a FY23 story, and the success of the Transformation program must deliver first. So far, BLD says the Transformation program has delivered $97 million of benefits (net of inflation) of the 5-year EBIT uplift target of $200-250 million.
BLD intends to implement some price increases to recover rising energy (and other) costs, but the competitive intensity of the heavy construction materials industry in Australia will limit any real gains. Price increases implemented in 1H22 only delivered an EBIT benefit of $4 million which was dwarfed by general inflationary pressures which gouged $24 million from the result.
Beyond the price increases, BLD will need to rely on leverage through the business as volumes improve and management continues to right-size the cost base.
Investment view
Investment view
Investors will need to see some real evidence that the changes being made to the group are delivering on the target. 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 we are not yet brimming with confidence it can be achieved.
Post the $3 billion capital return, BLD has at least another $500 million of surplus capital. Financially, the company is in better shape, but operationally it needs to step up its game.
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.
