Building products and cement giants Boral [ASX:BLD] have seen its shares jump by 5.3%, trading at $4.94 per share today as the company makes strides in its turnaround strategy.
The company operates more than 300 industrial sites nationwide, producing concrete, cement, asphalt, and quarrying stone. They also recycle construction and demolition waste.
In its statement today, the company lifted its FY24 guidance on underlying earnings before interest and tax (EBIT) to $300–330 million, up from $270–300 million.
The upgrade comes just over a year after the appointment of CEO Vik Bansal, who billionaire Kerry Stokes tasked to return the company to profitability. The Stokes family owns a 73% stake in the company after a drawn-out takeover in 2021.
The company suffered significant losses during the pandemic era and sold down its $4 billion in US assets to focus on its Australian construction roots with construction materials.
Under Mr Bansal, the company has been building momentum, with shares up 71.5% in the past 12 months as he set out on cost-cutting and repricing efforts.
What does today’s share price jump mean for the company moving forward?
Source: TradingView
Boral refocuses
Boral said the upgrade today incorporated a better financial result seen in the four months to October and was confident that those ‘gains could be held the remainder of the fiscal year’.
For the construction giant, the major turnaround was seen in FY23, with heavy cost cutting and price increases that some could argue went above inflation markups.
Group revenue has steadily increased, with a 17% increase last financial year to $3.5 billion thanks to price 10–12% increases across its products.
These increases and cost-saving initiatives improved the company’s EBIT by 106% to $232 million.
The company also returned its margins to prior levels with a 289-basis point increase to 6.7%. Boral is targeting double-digit margins as the next primary goal in its strategy.
Boral CEO Vik Bansal said:
‘We are pleased to upgrade our FY24 guidance, with year-to-date performance reflecting greater discipline in the pricing and cost from our operating model. Price realisation remains extremely important in the current inflationary environment.’
While its financials appear to be returning to health, the company is now under pressure from some investment funds.
In its last general meeting in October, the board narrowly avoided a strike in its remuneration report as funds let the board know they were unhappy with the company for walking back its 2025 carbon emission targets.
Boral said the targets were ‘unrealistic’ and ‘akin to greenwashing’ if they were kept at that level, due to the unlikelihood they would be reached.
In a letter to the board, investors HESTA, AMP, Australian Ethical, and Plato Investment Management warned that the revised targets ‘risked its long-term value’and that any new targets should be ‘appropriately aligned with an orderly and ambitious transition’.
Outlook for Boral
With the ship set in the right direction, the company should be in a better position for the years ahead.
This is an impressive accomplishment, considering the economic background in which this has been achieved.
But we should also consider the longer-term implications of the company’s turnaround.
The 10% bump in projected earnings from hard cost-cutting and rising product prices — neither of which bake in structural longer-term performance.
Let’s look at the pricing as an example. The company said its repricing was ‘long overdue’and had been spurred by jumping cost trends due to inflation.
Source: Boral
We can see cost jumps that need to be addressed here, but the company may have gone too far in a fragile construction environment.
This is significant if we consider that between July 2022 and April 2023, 1,709 construction companies across the country went bankrupt, according to ASIC.
Between an ailing construction sector and heavy cost savings, the company could run into far more long-term headwinds than others if the headwinds continue in the coming calendar year.
There is still time for the company to address these challenges, as it now stands in a leading position and can invest forward from here. As Mr Bansal said:
‘Boral’s competitive advantage comes from its vertical integration, enviable infrastructure assets, footprint and strong brand.’
But there could be one factor that threatens this.
Green roadblocks
When Vik Bansal thinks about the energy transition, ‘his mind goes to the 5500 blue-collar workers that work in the manufacturing plants across the country’.
At the latest energy summit, Mr Bansal became Australia’s best example of the actual cost of the stalling energy transition.
Not enough renewables in the pipeline, transition powerlines behind schedule, rooftop solar grids isolated, slow decarbonisation efforts — all of these are adding to the problem.
Mr Bansal has not been shy to tell whoever would listen what the transition has cost the company. In early October, at the AFR Energy & Climate Summit, he was very candid about the impacts of the high renewables requirements and high energy costs on the business.
‘At a certain price during the day, when the price goes up to a certain level, manufacturing stops. Because we’ve worked out economically, it’s actually better to have thousands of people waiting idle for the prices to come down than actually do the work.’
Our Editorial Director, Greg Canavan, has been talking about the costs of the ‘Net Zero’ movement for some time.
We have a new book on the subject coming soon, so watch this space!
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Click here to learn more about nuclear and how it can be a solution for our future, plus five companies that should be on your watchlist.
Regards,
Charlie Ormond
For Fat Tail Daily
