In December, Boral will have a new CEO (Vik Bansal). Although industry activity is regathering after severe disruption in FY22, inflation and energy cost increases present a stern challenge.
BLD’s FY22 result was within the guidance range set at the May trading update. FY22 EBITDA from continuing operations (Construction Materials and Property) was $325 million, down 15% on last year.
BLD has waved a white flag on its transformation program with the $200-250 million target in earnings benefits after inflation by 2025 now no longer part of the strategy. BLD did deliver $42 million of benefits in FY22 but this was below the target $60-75 million for the year. Instead, the focus will be to simply deliver earnings growth through pricing, performance improvement, and volume growth off the FY22 base.
The inflation pressures heading into FY23f remain significant. Energy and cartage costs put a $58 million hole in FY22 earnings. Construction shutdowns and heavy rainfall added to the pile so that EBIT was adversely impacted by $136 million. This more than offset the higher revenue and transformation benefits.
Assuming an inflation increase of 2.5% on BLD’s FY22 cost base of approximately $2.4 billion (excluding energy), this becomes a $60 million headwind in FY23f.
BLD is completely exposed to very high coal and diesel prices as it is unhedged for both of these inputs (Figure 2). Gas and electricity comprised $92 million of BLD’s FY22 energy bill and both are experiencing elevated prices. It is difficult to accurately quantify the impact the factors will have on FY23f earnings, but it seems abundantly clear that BLD (and the industry) needs to raise its prices, probably by more than the FY22 prices increases for concrete (1%) and quarries (3%). The CEO did indicate that announced price increases are the highest in over 5-10 years (again, why the opacity?).
In another change, the estimated $1.1 billion in ‘surplus’ property will be repurposed (with external partners), not divested. There are 30 properties with over 3,800ha. Under the new property strategy, there is unlikely to be any meaningful property earnings until FY25f.
Investment view
BLD must step up and pull hard on the price lever in FY23f.
Failure to offset the ravages of rising inflation and energy costs would consign FY23f earnings to the same rubbish heap as FY22.
The problem for the market is that the quantum of the cost increases is unknown, and therefore even if prices are lifted, it may not be enough to simply negate the cost impost, let alone improve earnings.
The new CEO starts towards the end of 1H23f, but the current management has surrendered on its Transformation Program in the meantime. BLD cannot afford to tread water.
The new property strategy has also kicked the can down the road in terms of earnings.
BLD is essentially now a single industry business, and it has picked a difficult one. There is no shortage of competition in an industry known for its obstinacy.
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 in-coming CEO (December 2022) could make significant changes to the company’s strategy.
Recommendation
We have retained our Sell recommendation.
Figure 1: FY22 Result
Figure 2: Energy and fuel costs
Figure 3: CAPEX
