Boral, along with most of the building materials sector, underperformed the index significantly in 2018. In addition to softening macroeconomic data, investors have expressed concern on two fronts: 1) Boral’s guidance for FY19 remains optimistic; and 2) the company may need to raise equity to buy out the remaining 50% of the USG Boral Plasterboard joint venture (JV).
Ord Minnett agrees with the former, but we see scenarios where Boral could debt-fund a transaction, including returning to 100% ownership or forming an expanded JV, yet keep leverage and gearing metrics in a comfortable range.
- Buyout option – The downward trend in market multiples and the prospect that Knauf’s regional exposure would be in breach of the JV agreement – Knauf and USG propose to merge their businesses – leave Boral in a strong bargaining position to buy out USG’s 50% interest in the JV. We believe Boral could aim to pay as little as $800m, which in our view would represent an excellent use of funds with plasterboard in Asia set to experience continued structural demand growth. We note USG expects the merger with Knauf to close in early 2019.
- Expanded JV option – The JV, both in its current structure and under new ownership, has a perpetual licence to USG’s current (and improved) Sheetrock technology in the region. The licence is exclusive until 2024 and non-exclusive thereafter. Access to step-change technology, such as NextGen 2.0, is subject to a royalty fee. Given the need for Boral to invest in R&D, an expanded JV with Knauf or another party with access to intellectual property could be an attractive option for Boral.
We retain our Accumulate recommendation on Boral with a $7.40 target price. The growth prospects for the company remain robust, although FY19 guidance appears optimistic. As noted above, Boral is in a strong negotiating position to purchase USG’s stake at an attractive price, potentially bolstering earnings growth further in the periods ahead.