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This key ASX stock pick in the building sector has multiple re-rating opportunities

rising Boral share price asx share price represented by investor in hard had looking excitedly at mobile phone
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Many ASX building material stocks have been outperforming but one laggard has several opportunities to play catch up in 2021.

The stock in question in the Boral Limited (ASX: BLD) share price, which is barely sitting on a 1% gain over the past year.

In contrast, the James Hardie Industries plc (ASX: JHX) share price surged 26%, BlueScope Steel Limited (ASX: BSL) share price added 17% and CSR Limited (ASX: CSR) share price gained 8%.

2021 outlook for ASX building material stocks

Sentiment towards these stocks have been bolstered by stronger than expected housing construction approvals and starts in the US and Australia.

The sector is likely to remain well supported despite fears that tailwinds will start to wane.

“Looking into 2021, investors are asking when does the sector peak? November AUS detached housing approvals of ~138k are 2 standard deviations away from the long term average of 107k, which suggests we are near the peak,” said UBS.

“However, prior peaks were defined by rate hikes. Unless we see a rate hike or credit lending restrictions tighten, housing likely has more upside this year.”

Boral share price in the spotlight

While this is good news for ASX building materials shares, it’s the Boral share price that investors will want to watch. UBS believes 2021 could be Boral’s year as it has multiple chances to play catch-up.

In the first instance, Boral could be cum-consensus upgrade. The market is expecting Boral to post a FY21 earnings before interest and tax of $412 million. UBS reckons that’s too low and is forecasting EBIT of $460 million instead.

Greater clarity on valuation

Management could also quantify a cost-out target. This could spur excitement in the stock as many have been left guessing what the savings will be. UBS believes the number if $75 million.

Thirdly, if rival Knauf sells its plasterboard assets, like UBS expects, investors will be able to value the USG Boral joint venture divesture more confidently.

“We expect more US BMAT [building materials] sales, the late 2020 sale of Midland Bricks for A$250m or 8x EV/EBITDA (2021 UBSe) signalled the start of the US BMAT exit,” said UBS.

“We think the market is not pricing in any of these four events.”

ASX stocks to buy for 2021

The broker is recommending the Boral share price as a “buy” with a 12-month price target of $5.60 a share.

But Boral isn’t the only ASX stock in the sector that UBS likes. It’s also recommending investors buy the James Hardie share price, CSR share price and Brickworks Limited (ASX: BKW) share price.

Where to invest $1,000 right now

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

The Motley Fool Australia owns shares of and has recommended Brickworks. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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