Construction still patchy, says Boral

Boral said patchy housing market conditions have clouded its Australian earnings outlook.

Boral CEO Zlatko Todorcevski. Picture: Jane Dempster.

Boral said patchy housing market conditions have clouded its Australian earnings outlook, as economic uncertainty and tepid demand offset a revival in its US business, with the construction materials giant opting not to pay an interim dividend.

The number of new high rise apartments approved fell 14 per cent nationally in the first half of 2021, with the biggest market of NSW hit by a 26 per cent decline amid a looming end to government stimulus, the COVID-19-sparked population shift away from cities and low immigration levels.

“From my perspective I don’t see it rebounding in the near term,” Boral chief executive Zlatko Todorcevski said after releasing its first-half results on Tuesday.

“Clearly there’s a stock of multi residential apartments that need to be worked through and we really need to see a rebound in immigration.”

People moving out of cities into rural areas was also a factor, with September quarter statistics showing the largest migration levels on record.

“We’re watching pretty closely the amount of migration in Australia out of capital cities,” Mr Todorcevski said.

While detached housing approvals were up 10 per cent in the period, Boral said it was difficult to gauge how that market will perform in the second half.

“What we can‘t tell at the moment is was that outcome driven by stimulus measures like JobKeeper and HomeBuilder or is there something fundamentally happening in the market,” Mr Todorcevski said.

Boral’s underlying net profit was unchanged at $156m on the same period in 2020, ahead of analyst forecasts, but investors were disappointed with the murky outlook for the group.

“The company did not provide quantitative guidance on earnings, but did note improving housing demand in North America, offset by softer demand in Australia,” Citi analyst Lisa Huynh said.

Boral shares fell 40c, or 7.4 per cent, on Tuesday to $5.01.

The board decided not to pay an interim dividend, due to net debt of $1.9bn being higher than Boral’s target of $1.5bn.

Australian revenue declined 8 per cent to $1.61bn due to lower volumes and pricing, especially in NSW and Queensland where major project work and multi-residential activity declined. Income at its North America unit also fell 3 per cent, with strength in building products offset by a weaker September quarter and a lower contribution from its fly ash division.

Boral confirmed the appointment of Bank of America to advise on a potential US deal amid mounting shareholder pressure for a divestment with private equity groups and industry players tabling interest in its building products business.

Still, Mr Todorcevski remains open to either a sale or keeping the unit in-house.

“The market is good at the moment but we want to make sure we position these businesses in as good a shape as we can. So we had challenges through COVID-19 and some of the business hadn’t really delivered on their potential in the last couple of years. So how do we think through how we pitch the future outlook of those businesses recognising those short-term challenges,” Mr Todorcevski said.

“We think there’s a lot of upside in these businesses and I’d love to test it and see if there’s a better outcome. But at the end of the day if we can’t get what we think is really good value, we’re happy to hold and get the upside that we know sits there particularly in the current market context.”

Shareholders including its largest investor, the Kerry Stokes-controlled Seven Group, have been pushing for it to offload its underperforming US division to unlock value for investors, particularly after it took a hefty $1.2bn writedown at its results.

Boral also plans to boost earnings by $300m by an unspecified timeframe through running plants more efficiently, finding new sources of revenues and potential asset sales.