Finally, Boral is gaining some traction from price increases which is just enough to cover inflationary cost increases. As the latter eases into the second half, BLD could complete a more satisfactory year and even begin to believe it is on a recovery path. But is the recovery a mirage?
BLD’s interim net profit of $56.8m was up 53% on the same period last year but from a low earnings base. The low rate of cash conversion, together with limited franking credits, meant the Board decided not to declare an interim dividend. Net debt fell modestly to $455.4m.
Price actions, volume growth and cost discipline combined to lift EBIT (excl Property) by 23% to $95.4m compared to last year. EBIT margin also improved to 5.7% although this is a long way from the double-digit margins the company is espousing at some future time.
Energy (+54%) and cartage costs (+20%) have weighed on BLD’s performance. Unhedged 1H23 energy costs reached $122m, above the $119m reported for 2H22. BLD continues to look for alternative fuel sources and processes to reduce costs at its Berrima cement plant. The completion of a chlorine bypass in 4Q23 will reduce the kiln’s dependence on coal and should increase use of alternative fuels towards 30% (from 15%) by the end of FY23f.
BLD has approximately 30 surplus properties valued at ~$1.0bn that will be progressively sold.
Investment View
The early signs are good for new CEO Vik Bansal as he applies a refreshed approach to how BLD operates. The indication that price increases are holding is encouraging but competitive intensity is the challenge. It might only take one nervous independent cement supplier to trigger a price implosion that spoils the margin party.
Mr Bansal’s call for the company to achieve price realisation across the country and for cost discipline will set the tone for its management team. He said: “Price erosion is not an option for Boral”.
The share price recovery this year partly reflects the market warmth towards Mr Bansal (he joined the company in October 2022).
Earnings can also be buffered by the sale of the excess property over the next few years.
The hesitation on BLD is the industry’s long history of ill-discipline which could de-rail ambitions of higher EBIT margins and ROFE (return on funds employed). Even with an earnings recovery by FY25f, BLD is still trading at a higher relative multiple to the market suggesting the share price today is too high.
Now primarily focused on Australia, BLD’s new strategy has weathered a tough period. The worst could be over from an earnings perspective, but even with a (modest) recovery, we do not see the current share price as being justified.
Environment
An interesting aspect of BLD’s business is its energy-intensive production of cement which is well-known for its emissions. Less well understood is that concrete absorbs CO2 throughout its life cycle, a process called ‘recarbonation’. BLD notes that the uptake of CO2 in cement infrastructure offsets between 20% and 55% of the process emissions from the original cement production.
BLD said that its total cement production since 1991 is expected to absorb more than 5.6mt CO2 during the life of its end products, assuming the lower end 20% mark. At the upper end 55% mark, the CO2 uptake would increase to 15.6mt. Recarbonation does not eliminate BLD’s emissions but does have a material impact.
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 retain our Sell recommendation.
Figure 1: BLD 1H23 Result
Figure 2: PE ratio remains high
