Building approvals on a downswing; A look at 3 Building and Material Stocks: BLD, JHX, IPL

As per the recently released date of Australian Bureau of Statistics (ABS), the number of dwellings approved declined by 0.8% (trend terms) in the month of October 2019, mainly driven by approvals for private sector houses, which decreased by 0.9% over the month.

ABS Data Highlights

  • The trend estimate for total number of dwelling units approved in New South Wales fell 4.6% in October;
  • The trend estimate for total number of dwelling units approved in Victoria rose 1.3% in October;
  • The trend estimate for total number of dwelling units approved in South Australia rose 3.1% in October;
  • The trend estimate for total number of dwelling units approved in Western Australia fell 1.0% in October;

October key figures (Source: ABS)

In the light of above-mentioned scenario, let us now take a look at the performances of few ASX-listed construction and material stocks.

Boral Limited (ASX: BLD)

Australia’s leading construction material and building supplier Boral Limited (ASX: BLD) mainly operates two business:

  • Boral Australia- A leading, vertically integrated construction materials player supplying residential, non-residential and infrastructure construction markets;
  • USG Boral- A gypsum-based, interior linings product leader in Asia, Australasia and the Middle East.

Last year, due to the softening of housing-related demand in Australia, the company witnessed some delays in large infrastructure projects in Australia. The demand was also softened in USA and South Korea. Despite this on a continuing operations basis, the group’s reported revenue for FY19 (30 June 2019) was 4% higher than the last year while its group EBITDA was 2% up.

For FY19, Boral Australia delivered an EBITDA of $593 million with strong EBITDA margins of 16.6%, and EBIT returns on funds employed of 15.1%. For the same period, Boral North America reported EBITDA of US$297 million, while the US business delivered solid earnings growth with attractive EBITDA margins of 18.6%. In FY19, the company’s USG Boral gypsum joint venture delivered an underlying EBITDA of $252 million in FY2019, which was down 6%.

In the first quarter of FY2020, Boral Australia witnessed lower earnings due to softer housing market in Australia and slowdown in infrastructure projects and to make things worse, the company also witnessed an unplanned business disruption at its Peppertree Quarry, resulting in around a week of lost production.

Like Boral Australia, the first quarter earnings from Boral North America and USG Boral were lower than last year.

FY2020 Outlook and Guidance

  • For FY2020, the company expects its NPAT (before significant items) to be around 5 to 15% lower than FY2019;
  • FY2020 Property earnings are expected to be around $55 to $65 million;
  • Boral’s EBITDA in the H1 FY20 to be around 5% lower than the prior year;
  • In the second half of the year the company expect EBITDA to be broadly similar to the reported second half EBITDA last year;
  • In Boral Australia, the company expect several major projects to ramp up in the second half, including Queens Wharf and Westgate Tunnel projects;
  • Boral Australia expects to deliver additional improvement initiatives over and above the already planned FY2020 savings of around $40-$50 million from its supply chain optimisation, rightsizing and organisational effectiveness programs.

In the last three months, BLD stock price increased by 19.35% as on 2 December 2019. The stock is trading at a PE multiple of 22.07x with an annual dividend yield of 5.18%. At market close on 3 December 2019, BLD stock was trading at a price of $4.980 with a market cap of around $6 billion.

James Hardie Industries plc (ASX: JHX)

World leader in the manufacture of fiber cement siding James, Hardie Industries plc (ASX: JHX), witnessed a growth of 2% in its Net Sales for the half year ended 30 September (HY20). For the half-year period, the company’s Net profit was at USD 189.6 million, up by 18% on the previous corresponding period (pcp).

Notably, during the second quarter of FY2020, the company reported strong performance with growth reported in Net Sales and EBIT of all three regions: North America, Asia Pacific and Europe in which the company operates.

JHX FY20 Outlook

  • JHX expect modest growth in the US housing market in fiscal year 2020;
  • New construction starts between approximately 1.2 million and 1.3 million;
  • North America Fiber Cement segment EBIT margin to be between 25% and 27%;
  • In Australia, the company expects its addressable underlying market to experience high single digit percent contraction in FY20 compared to FY19;
  • Europe Building Product segment to achieve year on year net sales and EBIT margin growth

In the past six months, JHX stock price increased by 61.46% on ASX. The stock is trading at a PE multiple of 33.190x with an annual dividend yield of 1.44%.

Incitec Pivot Limited (ASX: IPL)

Recognized as a world leader in the resources and agricultural sectors, Incitec Pivot Limited (ASX: IPL) is primarily involved in the manufacturing and distribution of industrial explosives, industrial chemicals and fertilisers, and the provision of related services.

FY19 (year ended 30 June 2019) was a challenging year for the company, with performance impacted by a number of events, some of which were beyond the company’s control. The Company reported Net Profit After Tax for FY19 of $152.4 million, after $140m of non-recurring items, compared to $347.4m in FY18. At the end of Fy19, the company’s balance Sheet had a Net Debt/EBITDA ratio of 2.8x (pcp 1.6x), following completion of the previously announced $300 million share buyback. The Board declared a final dividend of 3.4 cents per share, 30 per cent franked, taking the total dividends for FY19 to 4.7 cents per share, representing a payout ratio of 50% of NPAT.

In the past six months, IPL stock declined by 2.71% on ASX. At market close on 3 December 2019, IPL stock was trading at a price of $3.140 with a market cap of around $5.19 billion.


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