Is Boral bouncing back?

As far as financial performance goes, Boral hasn't been a roaring success. Operating profit before abnormals has been on the slide for the last decade, declining from over $500m in 1989 to a little under $300m in 1998. In that same period sales growth has averaged a measly 2.6% per annum.

Investors have correspondingly punished the company. The share price, which stood at $3.00 at the start of the decade, is now only $2.77, although it did make a $4.50 high in early 1994 on the back of Tony Berg's appointment as MD. We haven't looked at the stock since a brief mention in issue 14 in which we said there was Better Value Elsewhere, and you can see why.

Is the worst over?

Nine months later we now believe that Boral is heading for better times. Its main under-performing divisions have been building products, currently on the mend as the domestic building industry recovers from its 1995 downturn, and energy, which has suffered thanks to lower oil prices since 1998. It too should benefit from the recent price increase. Like James Hardie and Pioneer, Boral has achieved strong profit growth from the North American building materials operations in recent years. Then there's Asia, currently generating red ink but likely to get back into the black as the region turns around.

And the better times are beginning to feed through to the bottom line. In the half-year to 31 December 1998, sales grew only 1.2% but profits were up 6.6% to $124.8m. EBIT growth in the company's building products and construction materials businesses was a healthy 13%.

With oil prices moving upwards this year, the energy operations should contribute to an improved full-year result. The star of the half-year was North America, where EBIT was up 55%, although these operations produce only 20% of total profit.

Energy acquisitions

There's also some excitement from the purchase by the Energy division of one of the Victorian government's gas retailing business, Energy 21, for $443m in March this year. This effectively doubles Boral's energy retailing presence. As we mentioned in the last issue when we reviewed AGL, the Australian power industry offers plenty of expansion opportunities.

So this is unlikely to be the last major acquisition by Boral Energy, although hopefully the company will refrain from over spending in the area. Also, as much of the Energy 21 acquisition will be debt funded, Boral's gearing will have crept up to around 80% - it was 54% as at 31 December 1998. Boral's finances, however, are managed fairly conservatively so gearing should fall from here on in.

While our preferred building materials stocks are James Hardie and Pioneer, with Boral's share price trading on a low PER of around 14.5 and not far from its twelve-year low, subscribers should start to ACCUMULATE as signs of a turnaround are starting to show.