The share price of Boral Limited (ASX: BLD) tumbled to a three-and-a-half-month low in early trade even as the building materials company posted a big uplift in earnings and revenue from its US acquisition.
The stock tumbled 3.1% to $7.20 as investors digested news that Boral's underlying earnings before interest, tax, depreciation and amortisation (EBITDA) were 50% higher at $500 million as total revenue increased 40% to $2.94 billion in the six months to end December.
But if you look beyond the headline numbers you will see a few cracks that may have spooked investors.
While EBIT showed a dramatic increase, it was mainly due to the US acquisition of Headwaters. Organic growth was far subtler as the 6% uplift in its interim earnings per share (EPS) to 18.2 cents shows.
Also, the US$18 million in synergies from its US business were more than offset by what are hoped to be one-off costs. These include integration costs, intermittent closure of power plants and safety issues that had to be rectified.
These "one-offs" will persist for the next two years with management tipping $180 million to $200 million in significant items for Headwaters in FY18 and FY19.
What's more, Boral's US operations actually slipped backwards on a pro-forma basis (when Boral's existing US business and Headwaters results are combined for 1H FY17 as a means of comparison to 1H FY18) and when adjusted for the exchange rate.
Further, Boral's Asian business is struggling. Earnings before interest, tax, depreciation and amortisation (EBITDA) for USG Boral slipped 1% to $149 million due to large cost increases.
Some may also be disappointed in the 12% EBITDA increase in its Australian division to $294 million as this business is well placed to benefit from an infrastructure building boom and the strong residential construction market.
But Boral's US expansion has always been the main game and shareholders can seek comfort in the fact that the integration of Headwaters seems to be going reasonably well despite warnings from some sceptics.
Management said it is on-track to exceed the US$35 million in forecast synergies for the current financial year and is forecasting significant earnings growth for the US division in the second half due to seasonal factors and as it recovers from the impact of major weather events (such as Hurricanes Irma and Harvey or the Californian bushfires).
While there could be some downgrades to analysts' forecasts, I don't think it will be significant. The sharp sell-off in the stock looks to be an overreaction but is perhaps not unexpected given Boral's robust 20% plus share price rally over the past 12 months when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up about 1%.
The market reacted much the same way to electronic retailer JB Hi-Fi Limited's (ASX: JBH) profit result yesterday.
I think Boral represents good value as it is trading on what I suspect is a FY19 price-earnings of around 16.5 times. As such I think Boral is worth buying on the dip.
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