Boral, other companies failed to predict inflation spike: Ryan Stokes

Seven Group CEO Ryan Stokes has warned that building products group Boral was among companies that didn’t predict inflation would spike as high and as fast as it has this year.

Seven Group chief executive Ryan Stokes: ‘The pace of change has caught a lot of companies, including Boral off guard.’ Picture: NCA NewsWire / Nikki Short

Seven Group chief executive Ryan Stokes has warned that building products group Boral was among companies that didn’t predict inflation would spike as high and as fast as it has this year.

His candid comments follow Boral’s appointment of the current head of InfraBuild, Vik Bansal, as its new CEO following the company’s exit from its US business and as inflationary pressures mount on the already-under-pressure building products firm.

“The pace of change has caught a lot of companies, including Boral off guard,” said Mr Stokes, who is the chairman of Boral. “Inflation is definitely a factor, but it’s not all bad. There has been cost led profit growth and now there needs to be price realisation.”

Boral has been squeezed by sharp increases in cement production costs, as well as diesel and coal prices. Add to that wages pressure and supply chain costs which are weighing on the balance sheet.

Federal Treasurer Jim Chalmers cautioned on Wednesday that inflation could top 6 per cent, telling Sky News Australia’s Economic Outlook forum that inflation would probably remain high for the rest of the year.

The Reserve Bank – which raised interest rates on Tuesday by a bigger than expected 50 basis points – has forecast an inflation rate of 5.9 per cent, which the market now believes is conservative.

Last month, Boral said its product price increases in January and February were having a positive impact, but not enough to offset rising energy costs. The company also warned its cost cutting measures were falling short, with an expected range of $45m to $50m for full year 2022, which is $15m below its targeted range.

Incoming Boral CEO Vik Bansal.

The Stokes family’s Seven Group took control of Boral last year, and under outgoing CEO Zlatko Todorcevski had begun simplifying the business by selling down more than $4bn worth of North American assets, and cost-cutting at the top level.

Mr Stokes believes the incoming CEO can get on with the business of delivering shareholder returns.

“The major transformation is done,” Mr Stokes told The Australian. “Now it’s about how to execute effectively and drive shareholder returns.”

Boral so far has failed to enjoy the benefits of the Australian construction boom, having posted two profit warnings this year on the back of extreme weather events and rising input costs.

Mr Stokes said Boral, under new leadership, would be looking hard at the prices it was charging customers.

Mr Bansal said in a statement he would be focused on return value for shareholders.

“I am excited to be part of Boral’s next phase of creating value for all its stakeholders through a culture of safety, and focus on service, sustainability and simplification.”

Mr Bansal’s appointment appears to have been well received by investors, with Boral shares up nearly 15 per cent at $3.28 in a higher market late Wednesday afternoon.

Macquarie Equities have an outperform rating on Boral and a price target of $4.05, viewing the appointment of Mr Bansal as a good fit.

“This is a good appointment, in our view. Mr Bansal is likely to drive the efficiency needed for Boral to better capture the opportunity ahead in firming infrastructure markets, while also reducing the negative operating leverage effect of market disruptions like weather,” Macquarie said in a research note.

Stokes’ Seven Group used a slow-moving raid on Boral to take control of the board last year and has been outspoken on the need for a reduced operational footprint and size.

It’s been a long time since the building company that spun out energy giant Origin has been considered blue chip, but Mr Stokes said its industry and specific business model made it an attractive proposition.

“We have a strong belief in the infrastructure outlook for Australia,” he said. “We see fundamental ability to unlock asset values. Our view is that it’s not about divestments, it’s around the nature of an integrated model.”

Mr Bansal, who was former CEO of ASX-listed Cleanaway Waste Management, will take up the role at Boral by December 5 at the latest, with his fixed remuneration listed at $1.5m annually.