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Boral faces cost pressures as supply chain disruptions bite

Nicki Bourlioufas  |  28 Feb 2022Text size  Decrease  Increase  |  
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The current macroeconomic environment and rising costs will be more challenging for many companies in 2022, including Boral and Brambles, with both indicating inflationary pressures are threatening their margins and cash flows.

Boral (ASX: BLD) reported a statutory net profit after tax (NPAT) of $1 billion for the half-year ended 31 December 2021, jumping from $167 million from the year prior, boosted by asset sales. But underlying earnings were weaker because of pandemic-related building disruptions, rising costs and extreme wet weather conditions. Underlying earnings before interest and taxes (EBIT) fell 23 per cent to $78 million.

Analysis from Morningstar suggests supply chain constraints and labour shortages are expected to remain a theme in the second half, with energy costs likely to remain elevated. 

“While volumes and prices remained strong, these were offset by unfavourable coronavirus shutdown, energy, and other costs,” analyst Mark Taylor said in a research note.

Boral said it would implement “supply chain logistics opportunities” to focus on customer service improvements and reduce costs.

Boral has successfully realigned its portfolio to focus on Australian construction materials. According to Morningstar, the company’s transformation program delivered $22 million in real cost savings over the first half and is expected to achieve a further $16 million to $31 million over the second half.

Taylor has increased his fiscal 2022 EBIT forecast by 54 per cent to $382 million largely due to the accounting treatment of assets held for sale, which resulted in a $110 million favourable depreciation variance versus the prior corresponding period. 

“While early days, we're optimistic about Boral's prospects under new CEO, Zlatko Todorcevski,” said Taylor, who has a $4.70 fair value on Boral, well above its market price of $3.60. That puts Boral in Morningstar’s 4-star territory, indicating it is moderately undervalued.

Other analysts, however, are concerned about rising costs and margin erosion for Boral. Credit Suisse has recently downgraded its forecasts for the company’s underlying profit over the full year 2022 with stronger revenues to be offset by higher costs.

“While some price rises have been put through in January, we expect further margin compression [in FY 2022] due to costs and high competition,” says a recent research note.

“We now model a worse net outcome from Covid lockdowns and Boral transformation targets, based on industry discussions which point to flat trailing prices and increased costs,” says Credit Suisse, which has lowered its 12-month price target to $6.48, down from $6.90.

Costs hit Brambles too

Another company facing rising cost pressures from global supply constraints is wide-moat Brambles (ASX: BXB). The pallet supplier reported an underlying profit for the six months to 31 December of US$481.2 million, up from US$465.0 million a year earlier (the company reports its results in US dollars).

Revenue jumped 8 per cent to US$2.77 billion after Brambles raised prices to recover "record levels of input-cost inflation and other cost-to-serve increases in all regions. Overall, volumes were broadly in line with the prior year".

Brambles warned that significant disruptions across global supply chains resulted in "extraordinary levels of input-cost inflation, operational inefficiencies and ongoing industry-wide lumber and pallet availability constraints". As a result, the company expects to lose $350 million in cash for the full 2022 fiscal year, up from a previous $200 million.

“Brambles is currently experiencing labour scarcity across its operations resulting in labour inflation. In addition to labour inflation there are also inflationary headwinds regarding lumber and transport,” says Morningstar equity analyst Mitchell Hawker.

But Morningstar’s Hawker is not expecting a big hit to the company's bottom line. He has maintained his $12.70 per share fair value estimate for Brambles, compared to its market price of around $9.80, which places it in Morningstar’s 4-star undervalued territory.

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“Brambles has several mechanisms which it uses to pass on inflationary headwinds to customers, including but not limited to indexation and surcharges built into customer contracts,” says Hawker.

“The majority of Brambles pallet flows support defensive fast-moving consumer good products that are relatively insensitive to the business cycle. We expect demand for these products to be consistent throughout the economic cycle rather than swinging with broader economic trade conditions.”

“In the EMEA segment, we expect margins to recover in the second half as contractual indexation supports the pass-through of higher costs to customers.”

Reflecting its robust first half result, Brambles raised its full-year underlying profit and sales revenue guidance. It now expects underlying profit for the 12 months to 30 June 2022 to rise 3 per cent to 5 per cent, compared with a previous expectation of 1 per cent to 2 per cent, with sales revenue to grow by 6 per cent to 8 per cent, compared with 5 per cent to 7 per cent previously.

The company declared an increased interim dividend of US10.75 cents, up from US10.0 cents, with a $2.4 billion share buy-back that will recommence on 28 February 2022.

is a Morningstar contributor.

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