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Morningstar | No-Moat Boral Downgrades Fiscal 2019 Guidance on Weak Volume; FVE Reduced 8%

No-moat Boral downgraded its full-year fiscal 2019 guidance on weaker-than-anticipated volume in the first half of the year. Boral now expects to deliver a largely flat EBITDA result in the Boral Australia and Boral USG segments in fiscal 2019, down from prior guidance of high-single-digit growth. Meanwhile, guidance for Boral North America EBITDA growth is reduced to 15% from 20%. The company also announced preliminary first-half results, due Feb. 25. Boral now expects half-year EBITDA of AUD 485 million. We trim our full-year fiscal 2019 EBITDA forecast, including USG Boral joint venture profits, by a marginal 1% to AUD 1,116 million. We expect price increases and favourable movement in the Australian dollar to offset the near-term earnings impact of weaker volume in the Australian and North American businesses. Nonetheless, we’ve tempered our medium-term volume forecasts for Boral Australia and North America, leading us to reduce our fair value estimate by 8% to AUD 5.80 per share. We continue to see value in Boral shares, however, which trade at an approximate 22% discount to our fair value estimate.

Boral assert that volume expected to flow from Australian infrastructure projects is simply delayed and will now come later in the cycle. But a softened global growth outlook drives our volume downgrade in both the Australian and North American businesses. We’ve revised Australian construction materials volume down to a five-year compound annual growth rate of 0.7% from 1.5%. We now expect the Boral Australia segment top line to grow at a five-year CAGR of 2.6%, down from 3.3%. The softened volume outlook also has a slight impact on segment operating leverage; we now forecast Boral Australia EBIT margins of approximately 11% at midcycle, down from 12%.

Forecast North American volume is also trimmed on the softened global growth outlook. We now forecast a five-year fly ash volume CAGR of 3.3%, down from 3.7%. We’ve also lowered our North American building product volume forecast by 0.4% to a five-year CAGR of 4.9%, reflecting a still bullish but marginally lower expected cyclical peak in the U.S. housing market. We now see the cyclical peak occurring in fiscal 2024 at 1.575 million total starts. While our revised cyclical peak is 25% above consensus expectations for total starts in 2018, we note is it approximately 2% below our prior forecast peak of 1.61 million starts in fiscal 2022. We now see Boral North America’s top line growing at a revised five-year CAGR of 4.1%, down from 5.3%, with a lower Australian dollar providing some offset to our lowered growth expectations for the segment. With tempered top-line growth, we now see EBIT margins of 13.8% at midcycle, down from 14.3%.