The property market continues its rise with the Sydney and Melbourne markets reporting high auction clearances. Other capital city markets like Perth and Brisbane are showing renewed strength, indicating the housing boom is spreading across the country.
What: Building materials producer Boral Limited (ASX: BLD) is down from a mid-April high of about $6 a share to $5.30 as the S&P ASX 100 Index (ASX: ^XTO) continues climbing. It has returned to a price level that it jumped to in February after its half year report showed an underlying net profit increase of 73%.
So What: The stock has pulled back, but the company still stands to benefit from the growing housing market. Increased buyer competition is pushing up housing prices, making new house construction more attractive. Here are three reasons why Boral can grow from here and the stock pullback may offer an opportunity.
1) Interest rates are still low
The current economic situation in Australia has a relatively high Aussie dollar combined with weaker consumer confidence. The RBA seems determined to keep interest rates low.
Some market experts estimate that there may not be any rate rises at least until 2016. That gives more incentive to property developers to build more homes. Boral's materials like concrete, plasterboard, pavers and bricks should see higher demand since detached house construction is rising steadily.
2) Rising housing finance for housing construction
Housing finance trend estimates are still growing for the construction of dwellings. In March, the estimated number of financial commitments for new home construction was up a seasonally adjusted 2.1% for the month, according to the Australia Bureau of Statistics.
Boral is expecting underlying earnings growth in FY2014 in Australia and Asia for its plasterboard products. Building products should deliver a small profit for the full year because of stronger demand and cost reductions.
3) New joint venture with largest US plasterboard producer
In the first half, Boral entered a joint venture with USG Corporation (NYSE: USG), the largest producer of plasterboard in the US. This will expand Boral's US presence as the US housing market is recovering. Its Boral USA business expects to break through profitability in the fourth quarter of FY2014.
The company will also have more access to other foreign markets like the Middle East, which will help diversify its revenue sources.
