Investors didn’t like the trading update from building products group, Boral on Tuesday.
In fact they took a positive dislike to it and sent the shares down more than 9% at one stage as they ignored some good news and focused on weather related problems in the US and in Queensland in the three months to March.
There was a strong suggestion in the update from Boral that it will use higher one off property earnings and a lower tax rate in the US to offset operational and trading problems at its building product businesses in Australia and North America
The shares eventually ended the day down 8.6% at $6.88, the lowest the share shave been since last October.
The update showed that the company’s March quarter earnings in Australia were below expectations due to “an unscheduled (cement) kiln outage at Berrima (NSW), continued challenging conditions in Western Australia, and a rain impacted Queensland market.”
Boral says it is expecting a better June quarter with more favourable conditions predicted. What investors didn’t appreciate was the way Boral lumped in gains on the sale of two properties in Sydney to offset the weaker performance in building products in Australia.
"Including Property, Boral Australia is now expected to deliver improved earnings growth with an expected increase of approximately 10-20% in FY2018 compared with FY2017, on both an EBITDA and EBIT basis. Earnings in Boral Australia were lower than we expected in the March quarter due to an unscheduled kiln outage at Berrima, continued challenging conditions in Western Australia, and a rain impacted Queensland market.
"However, a strong June 2018 quarter is expected from Boral Australia, especially if favourable weather conditions occur as they did in the June 2017 quarter.
"The sale of this property at Clunies Ross Street, Greystanes in New South Wales, is expected to contribute approximately $56 million of EBITDA in FY2018. Boral now expects a total EBITDA contribution from Property in FY2018 of approximately $55 million to $65 million, with the sale of the Prospect site having progressed earlier than expected.
"Boral’s Property pipeline is robust, and a more detailed update of the current pipeline will be presented at Boral Australia’s investor day scheduled for 16 May.”
That contribution from property will be more than twice the $24 million in 2016-17 and twice the $28 million the year before that – investors are always suspicious of big one off (or ‘lumpy’) gains from property transactions. The one off benefits of lower taxes in the US is another example of where the market is uneasy.
Investors also focused on the weaker than expected update so far as the company’s US operations are concerned.
"March quarter earnings for Boral North America were below our expectations. Significant rain in the Texas region and up through the Midwest, particularly in February, together with prolonged winter weather relative to the prior year when the spring recovery came early, had an adverse impact during the period.
"Operational issues reported in the first half are being resolved, although consolidation of production lines in the Oceanside metal roofing business in California are still being addressed and commissioning costs associated with the Greencastle stone plant continued to impact up until the end of March.
"In the Fly Ash business, higher costs associated with repositioning fly ash supply to customers due to the closure of the three utilities in Texas are having a short-term impact.
"With historically more favourable weather in the June quarter, coupled with pent up demand, synergy delivery and improving operational performance, Boral North America is expected to deliver an earnings lift in the second half of around 10-25% compared to the first half result, on both an EBITDA and EBIT basis.”
Boral said it expects the "benefits of higher property earnings, including a lower effective tax rate for FY2018 which is now projected to be around 19-22%, more than offsets the impact of lower expected earnings from Boral North America on Boral’s Group net profit after tax.”
