Boral CEO Mike Kane’s $3.5b US deal pays off

Boral’s tough talking American chief executive Mike Kane is feeling vindicated after earnings released on Wednesday showed that his decision to bet the company on a $3.5 billion acquisition in the United States is paying off.

Boral stock had been under pressure going into this week’s result partly because of concerns about the performance of Boral North America, which includes the fly ash company Headwaters acquired in 2016. The shares rose 10 per cent to $7.07 on Wednesday.

Boral North America delivered full-year earnings before interest, tax, depreciation of $US284 million, up 9 per cent on the pro-forma combined Boral and Headwaters result in 2017. Kane said Boral North America had strong fourth-quarter EBITDA margins of 20 per cent and full-year EBITDA margins of 17 per cent.

The company’s latest profit result beat expectations. Kane forecast a 20 per cent increased in earnings from Boral North America in 2019. He increased the synergy target by $US25 million.

When asked on Wednesday about the Headwaters acquisition, Kane said the deal was the most significant in Boral’s 75-year history and its performance is going to be “fantastic”.

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He said Boral North America had to cope with several headwinds including two hurricanes and a colder-than-normal winter, which slowed demand for housing products.

The company’s Australian operations benefited from the infrastructure boom and the expansion in the housing market. EBITDA rose 15 per cent to $634 million and return on funds employed of 17.5 per cent.

No need to raise capital

Kane forecast high single-digit EBITDA growth for fiscal 2019 in Australia despite slowing in the housing market.

The future ownership structure of Boral’s joint venture in Asia, USG Boral, is up in the air because USG has been acquired by a German building products company Knauf. This has triggered pre-emptive rights for Boral to acquire Knauf’s half share.

Kane is faced with an interesting challenge in relation to USG Boral. It needs capital to expand to meet future demand in Asia and that could pressure Boral’s balance sheet if it is 100 per cent owned.

Kane hinted that Boral would be better off finding a new partner. But he did say that if Boral does buy out Knauf it would use internal resources rather than do a capital raising. The half share is worth at least $500 million.

Boral shareholders would not want to have their interest diluted so soon after the $2 billion share issue conducted in 2016 for the purchase of Headwaters.

Kane said all options were being examined in relation to USG Boral and it could take some time to come to a final decision.

Either way, Kane is happy with the performance of USG Boral which has delivered 80 per cent growth in EBITDA since the joint venture was formed in 2014. Margins have risen from 13.6 per cent to 17 per cent since 2014.

Boral’s share of USG Boral’s earnings in 2018 was $63 million.

The market has been divided about the wisdom of the Headwaters acquisition and this is reflected in analyst recommendations and the huge gap in broker share price targets. Share price targets range from a low of $5.20 to a high of $8.45, according to S&P CapitalIQ.

Tony Boyd

tony.boyd@afr.com.au

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