Building materials company Boral Limited (ASX: BLD) is defying the market downtrend this morning as its shares raced to a three-and-a-half-month-high after management issued a profit forecast that was above market expectations.
Shares in Boral jumped 3.3% to $6.57 as the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) slumped 0.9% on weak offshore leads. Even Boral's peer like James Hardie Industries plc (ASX: JHX) is struggling as its shares fall 2% to $18.77.
Boral expected net profit before significant items to range from $240 million to $250 million for 2014-15 due to strong trading conditions in June and higher-than-expected property sales.
This would represent a big uplift to the group's $171.4 million underlying net profit in the previous year and is well ahead of consensus expectations of about $210 million.
Boral said property will generate a pre-tax profit of around $46 million, or $44 million on an after tax basis. The low tax rate is driven by carry-forward capital losses.
Property sales explain the bulk of the difference between management's guidance and consensus, but its underlying businesses (which include bricks, cement and plasterboards) are still growing faster than what most analysts were expecting and are around 4% to 8.5% above the average broker forecast.
That's good news for Boral's shareholders but maybe better news for its underperforming peer CSR Limited (ASX: CSR) because the update gives clues about the health of the Australian construction industry.
CSR is probably benefiting from similar tailwinds and Boral's outlook commentary will put the focus on the valuation gap between the two stocks with Boral trading at around a 17x 2015-16 price-earnings multiple (based on my estimates on the earnings upgrades analysts will be making on the back of the announcement), or a 40% premium to CSR.
Boral looks fully priced at around current levels and I think it's not a bad idea for investors to consider taking some profit and rotating into CSR.
CSR trades at a discount to the market due to its patchy track record but its recent update gives me some confidence about its medium term outlook.
Further, CSR and Boral have formed a joint venture to supply bricks to New South Wales, Victoria, Queensland, South Australia, Tasmania and the ACT.
While speculation that the Australian housing market is facing a supply glut in 2018 would be a risk to CSR, it is arguably a bigger issue for Boral due to the stock's market premium.
Boral didn't provide much detail in today's update but is expected to release a comprehensive review of its operations when it posts its full year results on August 27.
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