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Why the Boral share price crashed to a multi-year low

The Boral Limited (ASX: BLD) share price crashed this morning after the building materials group released its full year results and announced a series of corporate transactions worth over $650 million.

The Boral share price fell 12.3% in early trade to $4.35 – making it one of the worst performing stock on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.

This is one of the more highly anticipated announcements today with the Boral share price going through a bit of a roller coaster ride over the past 12-months as it hit a high of over $7 a share and slumped to a low of around $4.50.

The stock has underperformed the market by a mile as it has lost more than 30% of its value when the top 200 index is up 3%.

Big deals fail to inspire

Boral will be hoping that the acquisition of its 50% joint venture (JV) USG Boral Australia and New Zealand, the expansion of its Asian plasterboard JV with Gebr Knauf KG and the sale of its Middle East business to Knauf.

The total net investment for Boral is estimated at US$441 million with US$200 million attributed to the USG Boral Australia and NZ buyout.

The interesting thing is that Knauf, which acquired USG, has the option to buy back the 50% stake in the Australian JV within five years and at the same price (adjusted for investments Boral might make in the business).

While the buyout of the JV was expected by the market, the company didn’t properly explain why this call option was necessary.

The good news is that the deals will add between 3% to 5% to Boral’s earnings per share (EPS) before synergies and the required funding will be met through debt and proceeds from Boral’s recent asset sales.

Poor results taking a toll

Management will be hoping the multiple transactions will be enough to distract investors from its disappointing full year results as its adjusted EPS fell 7% to 37.5 cents per share and as revenue from continuing operations increased 4% to $5.8 billion.

Both missed consensus expectations. Brokers polled on Reuters were forecasting EPS of 39.9 cents per share and a top-line of $5.9 billion.

The results would have been worse if not for its US operations. This is probably the silver-lining for shareholders as Boral has gone big in that market following its acquisition of Headwaters in 2016.

The US division added $66 million to Boral’s earnings before interest, tax, depreciation and amortisation (EBITDA) while its Australian business detracted $41 million due to weak residential construction to leave group EBITDA at just over $1 billion in FY19, or 2% above last year’s result.

The weakness won’t abate in FY20 either. Management is forecasting a 5% to 15% drop in net profit for the current financial year due to pressure from its Australian businesses although it’s tipping further growth in the US, thanks in part to around US$20 million in targeted synergies from Headwaters.

Boral’s chief executive Mike Kane is running out of time and investors are running out of patience. The James Hardie Industries plc (ASX: JHX) looks like a much better bet for FY20.

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Motley Fool contributor Brendon Lau owns shares of Boral Limited and James Hardie Industries plc. Connect with him on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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