US building division to yield Boral $2bn if deal goes ahead

Boral could bank up to $2bn for its US building products unit if it does proceed with a deal.

Boral chief executive Zlatko Todorcevski. Picture: Jane Dempster

Boral could bank up to $2bn for its US building products unit if it does proceed with a deal, although uncertainty over what will be sold may have left some investors disappointed, analysts said.

The construction materials supplier said on Tuesday it would consider offloading its US building products business after receiving interest from suitors, but may also retain the division depending on performance.

That could reap between $1.5bn to $2bn, according to Citi, with a waiting game potentially delivering a better result.

“The company expects to explore a potential sale in 2021, when the US building products business will likely begin to reflect improved underlying housing market conditions. This could present upside risks to any potential price realised,” Citi analyst Lisa Huynh said.

Still, Boral’s North American asset review was a disappointment compared with market expectations by failing to specify what would be sold, Morgan Stanley argued.

“The review failed to deliver a decisive or definitive list of non-core assets — we believe the market was looking for confirmation of widespread US exits. Instead, management will look to improve operations, with a view to testing the market for certain (undisclosed) assets in the 2021 calendar year,” Morgan Stanley analyst Andrew Scott said.

Management may get the benefit of the doubt after surpassing expectations with the $1.43bn sale of its USG Boral stake.

“While we think this did fall short of what the market was hoping for, we believe that the good outcome on the JV earns management the benefit of the doubt. We expect material asset rationalisation will ultimately occur,” Mr Scott said.

The USG Boral deal still faces risks for Knauf, which is buying the half share from Boral, Goldman Sachs noted.

“One key impediment to the transaction remains the possible divestment of Knauf’s existing Australian assets, given competition concerns in the Australian plasterboard market — Knauf’s call option on USG Boral Australia was previously rejected by the ACCC, and the market remains largely concentrated between Knauf, CSR and USG Boral,” Goldman analyst David Schwartz said.

The USG Boral deal, allowing Boral to pay down debt, will start a balance sheet remediation process, according to Jefferies.

“The resultant commentary about future capital returns must have seemed alien to those worrying about a capital raising just a few months ago,” Jefferies analyst Simon Thackray said.

“A ‘leaner and more nimble’ Australian organisation and the identification of new property opportunities from sites previously viewed as essential leads to an expectation of a much more detailed operational review to follow.”

Boral shares fell 3.6 per cent on Wednesday to $4.57.