Boral paints bleak picture for housing starts

Boral paints bleak picture for housing starts
Published: 11 February 2009

Building products maker Boral Ltd continued to paint a bleak picture for housing starts in both its key Australian and US markets after posting a 44% fall in first half earnings Wednesday.

Net profit for the six months to Dec. 31 fell to A$75 million, from A$132 million a year earlier, and was in line with Boral’s downgraded guidance provided in late January but slightly below market expectations of A$78 million, according to a poll of five analysts by Dow Jones Newswires.

Boral’s earnings have been hurt by a slowdown at home, where the housing market is in its fourth year of a downturn and operating at less than half of its peak, as well as the third year of a U.S. housing slowdown and rising input costs.

Chief Executive Rod Pearse told reporters on a conference call that a 20% on-year contraction in first-half dwelling approvals across Australia, paints "a very disturbing picture as you look across the board," with all states posting declines.

The company is forecasting just 129,000 domestic housing starts in its second half, which Pearse expects to be "around the bottom of the housing cycle" but would not comment on the expected speed of the recovery.

Pearse said the firm also believes that the U.S. housing cycle, where starts are at 60-year lows, is "close to the bottom" but would not be drawn on the speed of any expected recovery.

"I think the next six months is going to be pretty nasty for Boral but hopefully that’s as bad as it gets," said one analyst at an international investment bank.

The analyst, who declined to be named, said that while the bottom line result met expectations, "the mix of it was not good" with a larger-than-expected fall in operating earnings offset by a lower tax rate.

Around 55% of sales and nearly 80% of the group’s earnings came from its Australian construction materials division that supplies concrete, cement and asphalt and which benefitted from strong infrastructure construction activity and price gains.

While earnings before interest and tax from this division were down just 4% from a year ago, EBIT from its domestic building products, which include plasterboard, bricks, timber and windows, fell 46%.

And in the U.S., where Boral plans to further cut its production of bricks and roof tiles to just 25% and 20% of respective capacity, the firm posted an EBIT loss of A$37 million.

Group sales in the first half were A$2.59 billion, down 1% from A$2.63 billion in fiscal 2008, and the company will pay an interim dividend of 7.5 cents, compared with 17 cents a year earlier.

Boral reiterated its full-year net profit guidance of A$120 million, which it slashed last month by 40% from its previous guidance of A$200 million, because of further deterioration in the Australian and U.S. housing markets.

"It is particularly difficult to forecast market activity at the current time, however, we are expecting the second half of the year to be particularly challenging," said Chief Executive Rod Pearse in a statement.

Pearse also said that Boral’s gearing had increased to 79% at Dec. 31, and in response to current economic conditions, capital expenditure this year of A$250 million will be around half of last year’s levels.

He said the firm’s financial metrics remain well within its debt covenants, with no material refinancing requirements until August 2011.

"Based on our access to bank facilities and our financial position relative to our debt covenants, we have no requirement to raise additional equity nor are we contemplating doing so", said Pearse.