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The stock tumbled 4.3% to $6.23 in late afternoon trade, making it the second-worst stock on the
S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index after personal care products supplier
Asaleo Care Ltd (ASX: AHY).
Boral issued a disappointing market update last month that was largely driven by bad weather in the US but management was confident of an improved performance in the June quarter of this year.
But Credit Suisse thinks its US problems aren’t only weather related and believes Boral’s key fly ash operations in that country are set to disappoint even though this business has many great attributes such as a lack of supply and unmet demand.
“However, the industry’s success at redirecting easily available supply to high value applications is approaching a limit, with incremental volumes to come from smaller, less proximate, and more difficult sources,” said Credit Suisse.
“Plus the track record warrants caution: Boral was unable to grow its fly ash revenues in the last decade, and Headwaters’ [a company acquired by Boral] targeted storage and reclamation efforts were not met in the ownership transition.”
Fly ash are fine particles collected from coal processing plants that have cement-like qualities to be used as an additive to cement.
Credit Suisse also warns that the stock is facing consensus earnings downgrades as expectations are too high with North America accounting for around 90% of expected growth from this financial year through to FY20.
“We estimate that consensus is forecasting 64% EBIT [earnings before interest and tax] growth FY18-20, 47% pre-synergies,” added the broker.
“We reduce our fly ash USD EBIT forecast 10%; now an estimated 10-11% below consensus North America, and 5% below group in FY19/20 adjusted for the [sale of Boral’s Denver-based concrete and quarry business].”
As a result of the earnings cut, Credit Suisse has lowered its price target on the stock to $6.40 from $7.45 a share.
Given how much has fallen though, I suspect the bad news is largely reflected in the current price. I also continue to believe that Boral represents one of the best ways to gain exposure to the accelerating US economy and stronger US dollar.
