Sandon Capital: Boral Limited

Boral Limited is an international construction materials and building products group with three divisions: an integrated construction materials business in Australia; a plasterboard joint venture in Asia, Australia and the Middle East; and a building products and fly ash business in North America

BLD has delivered poor shareholder returns for many years resulting in pressure on the company to divest its troublesome North American assets. This has led to the departure of the CEO and several Board members. A new major shareholder has secured two board seats and is likely to be a significant catalyst for change at the company.

The Australian construction materials business (aggregates/cement/concrete) is a high-quality business. BLD’s aggregates quarries hold privileged positions close to major metropolitan markets, a position that competitors cannot easily replicate. The market does not fully appreciate Boral’s pricing power on aggregates, partly because Boral has not acted as an industry leader. The Australian construction materials business should trade at 8 – 10x EBITDA, which represents a significant uplift from prices currently implied by the market.

Other value in Boral that has been overlooked are its property assets and landfill royalty. We conservatively estimate these are worth $1bn (80 cents per share), possibly more.

We believe BLD’s Australian operations have significant tailwinds arising from government focus on infrastructure spending to assist the economy’s recovery from COVID-19.

Even if the North American assets are sold, Sandon Capital believes Boral still needs to focus on improving the performance of its Australian operations as well as exploring ways to unlock the value in its property portfolio. To that end, we recently made the argument for the functional separation of the combined Australian property assets and the landfill royalty from the core Boral Australia segment.

If BLD can sell its North American assets for a reasonable price, run its Australia construction materials business better and optimise the value of its property and landfill royalty, we believe the shares could be worth >$8.

Potential risks include construction activity in Australia and the US, levered balance sheet (which can be cured by asset sales), FX and commodity price movements, industrial disputes, continued poor capital allocation and mismanagement of assets.

This information has been prepared and provided by Sandon Capital. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 15 October 2020 and is subject to change.