Australian building materials manufacturer Boral (ASX: BLD) has seen strong share price growth over the past 12 months, rising over 30% as the housing markets in Australia and the US have shown early signs of recovery.
Boral has four divisions: construction materials and cement (60% of revenue), plasterboard (18%), building products (11%) and US revenue (11%). The US component of revenue is made up of cladding (49%), roofing (21%) and non-housing fly ash and construction materials (30%).
The company’s US division has been loss-making for the past five years, with earnings before interest and tax loss of $60 million recorded in 2012-13. During a recent analyst tour of the company’s US operations in North Carolina, Boral reaffirmed its guidance of a return to profitability for the division in the 2013-14 financial year. Boral noted it would focus on “market share and price, cost and cash management” in order to achieve profitability.
The tour and presentation did not appear to impress analysts, with most doubtful that revenue could be meaningfully increased while demand remained low. The US housing market is slowly recovering and demand increasing, with analysts expecting 1.1 million starts in 2013-14, after peaking at 2.016 million starts in 2004-5 and dropping to 646,000 in 2008-9.
UBS noted that capacity utilisation remains at around 50%, while pricing power cannot be expected until the utilisation rate increases to 70%. This is especially evident in bricks, where the market demand of 3.4 billion is far exceeded by the supply of 9 billion.
Overall the analysts were optimistic about the cost savings achieved so far but were in general agreement that the shares were at fair value follow the recent rise.
Boral is exposed to the cyclical housing materials sector, which is starting to see increased demand and starts in Boral’s two markets, Australia and the US. Recent cost savings will help to push up profit in 2013-14 but analysts are doubtful that a meaningful recovery in US earnings is close to being realised. Foolish investors will know that only future performance counts and the 2013-14 results will be key to seeing if the company can take advantage of recovery in the Australian and US housing markets.
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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned.
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