Why UBS just downgraded its rating on Boral (ASX:BLD) shares

Challenges in Boral’s underlying markets are seen as upcoming headwinds.

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Shares in building and construction materials group Boral Limited (ASX: BLD) have fallen sharply this past week, having come off a high of $6.61 on 28 October.

Boral shares continued to fall into the red today, closing at $6.34 and down 1.09%.

What’s up with the Boral share price lately?

Investors were piling into Boral shares last week as the company conducted its AGM. Whilst not price sensitive in any way, investors did appear to scope out the company’s report, paying close attention to a trading update within the presentation.

Here, Boral outlined it had faced significant COVID-related headwinds that impacted its concrete sales when compared to last year.

As such, the company reported a 2% decrease in concrete volumes, underscored by a 14% decrease in concrete volumes in NSW from pandemic-induced lockdowns that saw the construction industry come to a standstill.

Although revenue and earnings took a hit from these challenges, it was the company’s outlook that offered investors relief.

Boral see’s a recovery in its operations as lockdowns subside, with this trend continuing across FY22 as society begins to normalise post-pandemic.

As investing hall-of-famers Warren Buffet and Peter Lynch each correctly point out in their writings, the market values a company’s shares based on a combination of past earnings history and future earnings expectations.

With that in mind, it would appear that the market was factoring in Boral’s revised outlook into its share price to fuel its gains after the update.

However, not all of those analysing Boral’s share price are as rosy on the company’s outlook and believe that market conditions are still tough out there for the company.

What are analysts saying about Boral shares?

The team at investment bank UBS reckons that whilst Boral’s concrete and quarry volumes were a touch better than expected, challenges remain for the company from underlying market conditions.

The broker has updated its modelling, and whilst it “lift[s] EBIT marginally, we still think core margins will struggle to gain traction until there is a meaningful recovery in Sydney commercial and apartment volumes”.

UBS also notes the string of asset divestments Boral has completed over recent times, which consequently slims down its business.

Analysts at the firm question if Boral is up to the test, which is made more difficult by weakening demand in the company’s core market of building and construction materials.

As a result, the broker cut its price target on the Boral share price by 5% – down from $6.80 to $6.45 – and reiterated its neutral rating.

At the time the note was released, this represented a roughly 0.6% discount to Boral’s share price, however, after today’s losses, it actually represents an approximate 2% premium.

Boral share price snapshot

The Boral share price has climbed over 28% this year to date, extending its run into the green to 32% over the past 12 months.

These results are each ahead of the benchmark S&P/ASX 200 index (ASX: XJO)’s gain of around 23% in that time.

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The author Zach Bristow has no positions in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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