Aussie conglomerate raising stakes in fraud-hit building products manufacturer

Summary

• Australian infrastructure project pipeline is long and growing, and systematic spending on it will help promote reopening of economic activity.
• In the wake natural disasters and coronavirus outbreak, the March quarter GDP contracted by 0.3%.
• A conglomerate, Seven Group, has been building stakes in Boral while Boral looks to clear stains prompted by an accounting fraud in its US operations.

Infrastructure spending is perhaps the way out for recovery from economic recession. It has strong multiplier effects that contribute to employment, better mobility, accessibility, trade, and overall productivity.

Policies related to infrastructure expenditure help to instigate a fiscal expansion when aggregate demand is subdued. Also, these policy initiatives assist for an increase in capital intensity or capital deepening, prompting an increase in productivity.

Researchers at the International Monetary Fund (IMF) cited that improvement in the amount of public spending would provide greater benefits. They also suggested that Governments should strengthen the institutions that are responsible for the overall management of public spendings such as planning, allocation, and oversight of finances. Another important point highlighted is an increase in debt backed infrastructure financing which helps to lower the public debt-to-GDP ratio.

Infrastructure Australia, an advisory body, plays an essential role in channelising the synergies of various stakeholders engaged in Infrastructure development. In its April newsletter, the agency informed that infrastructure would play a crucial role in promoting economic recovery as the aftermath of COVID-19.

Infrastructure Australia will continue to collaborate with the Government, community and industry for the basic structure needs of Australians. Its priority list would continue to highlight the spending priorities of the nation.

The agency’s analysis of the infrastructure market’s capacity to deliver the country’s elongated pipeline of infrastructure investments has resulted in additional responsibilities. These new responsibilities agreed with the Council of Australian Governments (COAG), intends that Infrastructure Australia will now collaborate with jurisdictions and peak bodies to monitor market’s capacity and help to formulate the Governments’ policies and pipeline development.

As per the Australian Bureau of Statistics, the quarter ended in March 2020, GDP print suggests a contraction of 0.3%– mostly due to COVID-19 outbreak which carried forward the problems started from Bushfire and other natural disasters.

Since Australia has been relatively more successful in limiting the spread of the virus, the country embraced easing of restriction in May, and restrictions continue to ease down throughout the States in a staged manner.

Risk-on sentiments are pushing highly cyclical Australian Dollar to levels seen at the beginning of this year. Besides, the country has recorded a substantial trade surplus, marking 174% gain in March 2020 at $10.6 billion with $19 billion for the whole quarter.

Seven Group Holdings is building stakes in Boral

A Sydney-based conglomerate, Seven Group Holdings Limited (ASX:SVW) holds a portfolio of business, including energy, industrials, media and investments. Its activities include heavy equipment sales, equipment hire, manufacturing of lighting towers, power generation, and dewatering equipment.

Seven Group, which has investments in listed businesses and properties, holds a substantial stake in Seven West Media Limited (ASX:SWM) as a part of media investments in few listed and unlisted media businesses. Energy portfolio includes a stake in Beach Energy Limited (ASX:BPT), working interest in Bivins Ranch, and SGH Energy - wholly-owned by SVW.

In 1H FY2020 ended 31 December 2019, SVV recorded revenue of $2.3 billion, up by 12% over the prior corresponding period. Underlying earnings before interest and tax were $417.6 million, up by 7% over the pcp.

It paid an interim dividend of 21 cents per share. Statutory profit for the period was $38.9 million, which was impacted by non-cash items. Underlying net profit after tax for the period was $255.7 million.

ASX filling update that Seven Group holds upto 10% stake or around 122.57 million shares in Boral Limited (ASX:BLD). It is evident that Seven Group has been building stakes in Boral since mid-March when it first purchased 3,561 shares at $2.82 per share.

Boral has been under pressure since December last year when it disclosed that its US Window business had overstated pre-tax earnings by USD 24.4 million for the twenty month period ending October 2019. Further investigations had confirmed that inflation-accounting was limited to Window business only. It terminated the employment of Vice President Finance and Finance Controller of the Windows business.

Recently, Boral also announced the completion of US Private Placement of notes worth USD 200 million. These unsecured senior notes have five year and seven-year bullet maturities and carry an average interest rate of 4.49% pa.

Also, the company secured two new bilateral agreements. First one being, two-year bank loan facilities of $365 million whereas the second one is loan facilities of USD 740 million, maturing in June 2024. Collectively, these loan financings substitute the existing USD 750 million debt facility scheduled to mature in July 2021.

In the initial four months to April, the Australian business has experienced a 6% fall in revenues. Likewise, the North American business recorded a fall of 5% in revenues while USG Boral has seen a 20% fall in revenues, all over the previous corresponding period.

It was said that revenues in the initial four months of 2H FY2020 have been lower compared to the pcp, and EBITDA margins for period were tracking 3-5% lower as against 1H FY2020.

On 4 June 2020, SVW last traded at $17.350, increase by 0.813% from the previous close.

On 4 June 2020, BLD last traded at $3.490, decrease by 2.786% from the previous close.

Since Boral has been distressed by the accounting fraud, its shares are down 27.91% over the past six-month period. But it appears that some investors are finding value in the building product manufacturer as an economic recovery awaits, which will likely need to accelerate infrastructure push across countries.

(All currencies in AUD unless or otherwise stated)