Seven Group’s bid for Boral called too ‘cheap’

Seven Group’s $3.1bn takeover of building giant Boral is “on the cheap” with investors likely to make more money by keeping it independent, says a high profile broker.

Clockwise from top left: Michael Caton as Darryl Kerrigan in the movie The Castle, a Boral truck and Seven Group CEO Ryan Stokes.

A leading stockbroking firm says Seven Group’s $3.1bn takeover of building giant Boral is “on the cheap” with investors likely to make more money by keeping it independent.

Sydney-based Aitken Mount Capital Partners in a presentation to clients said it foresaw “huge earnings growth in this business over the next five years and beyond” with the potential to unlock billions in property value.

Channelling iconic movie character Darryl Kerrigan of The Castle, Aitken calls for Boral shareholders to tell Seven ‘they’re dreamin’” “Seven Group’s bid for Boral is on the cheap,” Aitken Mount said. “Don’t allow billions of value be transferred to Seven.”

Aitken said family offices - funds run by wealth families - had the opportunity to acquire a 10-15 per cent stake in the company with the potential to more than double earnings in the long term. “There is far greater potential for upside in Boral as an independent entity than as part of Seven Group,” said Aitken. Seven Group earlier this month moved to garner takeover support from Boral shareholders for its takeover of the building group by improving the payment terms and removing all conditions.

Aitken Mount said buying a stake in Boral would give investors multiple options, including a stake in the largest quarry owner in Australia. Boral shares climbed 1.3 per cent to $6.18 Monday. Aitken Mount Capital partner Angus Aitken said “we are in no way negative on Seven. We just think you can make a lot more money keeping Boral listed separately.”

The Seven offer for Boral comes amid increasing consolidation in the building materials sector. Last month, CSR agreed to a $4.32bn takeover offer from French building giant Saint-Gobain. Paris-based Saint-Gobain will pay $9 per share for all of the 169-year-old Australian company as the Paris-based multinational seeks to establish a leading position in the Australian construction materials sector.

Aitken Mount said the current valuation of Boral in no way reflected the long-term margins and earnings potential. Picture: AAP Image/Dan Peled

Underscoring the potential of Boral’s construction materials business, Aitken Mount said only a limited number of quarries were approved in NSW last year.

Major new quarries typically take over a decade from the identification of the right rocks to obtaining environmental and other approvals.

“Most Australians have no idea what great businesses quarries are to own,” Aitken Mount said. “Each Australian requires seven tonne of stone, sand and gravel annually to

construct roads, houses and other infrastructure. An average new house consumes roughly 110 tonne of construction aggregates and 53 cubic meters of concrete while quarry materials constitute 80 per cent of concrete and 90 per cent of roads in Australia.”

While many investors would feel short-term pressure to accept the deal from Seven, Aitken Mount said the current valuation of Boral in no way reflected the long-term margins and earnings potential. “We love the idea of owning 10-15 per cent of a great private business alongside Seven, or 10-15 per cent of a great public business,” the firm said.

“Either way we see big upside for Boral long term. We believe there is around A$2bn in property value to be released from Boral over time, and in this deal, institutions are transferring that A$2bn of long-term property value all to Seven.”

Boral faces a tougher environment over the next few years as inflation feeds through the general economy and the massive infrastructure spending programs from governments across Australia start to slow. Boral is now trading at about 25 times its net profit and has proved there is still money to be made in the building materials industry even against the soft economic backdrop.

“All the analysts are too focused on what the Boral of the past looked like, none of them can see the huge upside this business has in earnings, free cashflow and value creation over the next 5 to 10 years,” said Aitken Mount.

Originally published as Seven Group’s bid for Boral called too ‘cheap’