We have sold our position in Boral Limited (BLD) based on three principle reasons:
I. Evidence of a slowing outlook for housing in Australia and US. Australian housing is showing growing vulnerability to a deeper downturn in housing commencements, whilst US housing activity has slowed with rising interest rates. With Australian and US housing accounting for c.15%-20% of BLD’s group revenue, the potential impact on earnings growth is material.
II. Growing evidence in the construction market that 2019 has started slowly.
III. The risk that Boral will acquire the remaining 50% interest in the USG Boral JV through raising more debt or undertaking a capital raising. Both options are unappealing given that BLD’s balance sheet is already geared too highly (post the US Headwaters acquisition) alternatively an equity raising would be earnings dilutionary and poorly timed given the depressed nature of its share price.
Our original investment thesis for Boral centred on its exposure to public infrastructure spending, a theme which remains attractive as both State and Federal governments have committed to a significant uplift in infrastructure projects. Our infrastructure investment thesis remains intact, but we believe this can be better captured through our holding in Adelaide Brighton, a leading manufacturer of cement and lime.