Boral downgrade highlights industry woes

Project delays, poor weather and a decline in residential construction are blamed for the downgrade.

While high auction clearance rates show there is certainly demand for housing, it is not flowing through to new housing starts, which continue to languish. Likewise with the mining sector coming off the boil and civil construction activity just plodding along, building materials company Boral (ASX: BLD) been forced to downgrade its profit expectations.

Management highlighted “declining residential construction activity in Victoria, project delays in both Victoria and South Australia and poor weather in south east Queensland” as contributing factors to stresses in the Construction Materials & Cement division. At the same time, Boral’s Australian Building Products division is also facing difficulties with lower demand and increased competition at its Western Australian brick and masonry operations and also pricing pressures on its timber products.

At the low end of Boral’s updated guidance range for the financial year ending June 2013 of $90 million in underlying net profit after tax, shareholders are looking at a 10% decline on the previous corresponding period. In early trade, Boral’s shares were down over 5% after this announcement.

Over the past 12 months the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up 18%. A check across the board at some listed peers shows that investors appear to be factoring in a recovery, with Boral, Brickworks (ASX: BKW) and Fletcher Building (ASX: FBU) all outperforming the index.

BLDchart

Source: Google Finance

There are likely some company-specific factors at play here and not the general domestic climate. Boral is also exposed to the USA and Asia markets, where the near-term outlook is more promising. While Brickworks’ share price has been buoyed thanks to ongoing attempts by activist investors to see the company divest its holding in Washington H. Soul Pattison & Co. (ASX: SOL). These investors believe there is value to be unlocked by separating the two companies from their current cross-shareholding arrangement. Lastly, Fletcher Building has exposure to the New Zealand economy and the re-build, which is currently underway in the wake of the 2011 Christchurch earthquakes.

Foolish takeaway

There is certainly potential for building material stocks to provide decent returns to investors over the next few years given the current stage of the building cycle and that valuations, in general, appear reasonable.

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