Boral’s share price reached $8.13 on 2 February 2018 ahead of its interim result announcement. Since then, however, the company has disappointed the market, with a weak first half and a guidance downgrade in April, resulting in a 22% share price decline since the peak. We maintain our Accumulate recommendation on valuation grounds, with a target price of $7.70.
We note the following key issues facing the company:
The fly ash business in the US is tackling supply problems following coal-fired power plant closures. We believe this dynamic will continue (for example, with the Navajo plant closure), but it is not a new headwind faced by the acquired Headwaters business or Boral. Over 2010–17, a period when more than 200 coal-fired power plants were closed in the US, we estimate fly ash volumes saw a compound annual growth rate (CAGR) of 2%. Headwaters’ fly ash margins expanded by 630 basis points over this period as well. We factor in flat volumes and underlying margins for the business throughout our forecasts.
A view held by some investors is that Boral’s Australian performance has been underwhelming given robust construction activity in recent years and peak ex-property earnings could be upon us. We disagree, as concrete volumes for the division have kept pace with broader activity since 2011, and there has been a substantial improvement in margins and divisional returns. We forecast modest volume and price increases over FY17–21, complemented by margin expansion following significant upgrades to fixed assets, with the proposed Geelong mill to contribute from FY21.
It has been an uncertain period for Boral since the Headwaters acquisition in May 2017, but we believe the stock offers compelling value at current share price levels. Sentiment has turned too negative, in our view, and we are comfortable with our adjusted EPS CAGR projection of 13% over FY17–20. Changes to our earnings forecasts are immaterial over FY18–20, although we have lifted our capital expenditure assumptions for the Geelong grinding mill.