Good Signs for Australian Construction As Boral’s Profits Jump 23%

Boral Limited [ASX:BLD] is one of Australia’s largest building and construction companies. They work extensively within Australia with operations extending to the US and Asia. With global markets on the verge of plummeting, many businesses are cutting costs.

The aim is to squeeze margins. And you’d probably think a company like Boral has no chance. Yet Boral posted double digit figures for NPAT (net profit after tax) this morning.

Boost in construction boosts profits

Boral reported a 23% increase in NPAT. Revenues increased to $137 million. And sales revenue from continuing operations totalled $2.2 billion. Boral has also bumped up their interim dividend by 29%. Dividends are now sitting at 11 cents per share which are to be paid on 11 March.

With numbers like these no one is surprised by Boral’s share price rally this morning. Boral shares jumped 6.89% reaching a high of $5.52 per share. But have since retreated as the market corrects itself.

Boral Share Price 10Feb16

Source: Google finance

Boral’s CEO, Mike Kane said improvements across all divisions contributed to lifting profits. ‘The substantially improved result is a reflection of our commitment to improve Boral’s cost base, grow our margins and respond more quickly and more efficiently to market conditions,’ Kane said.

But if business is booming, why then did Boral’s shares drop so quickly? Construction isn’t Boral’s only activity. Resource-based projects like LNG (liquefied natural gas) is also under Boral’s umbrella. LNG projects through Australia hindered Boral’s potential performance.

Regardless, Boral’s performance could imply a strong Australian construction industry. Kane himself stated that ‘the success of the first half is underpinned by a very strong residential construction market in NSW, a solid performance in South-East Queensland…and a successful growth strategy in the gypsum business in Australia and Asia.

 Is Australian construction booming?

There isn’t definitive evidence, but Australian construction may be the place to park your money. Taking a look at Boral’s revenue breakdown, construction activities make up the majority.

Boral’s construction materials and cement segment delivered a 6% lift in earnings. This was also assisted by $5 million in property earnings. Yet Boral isn’t the only build profiting off industry growth. Stockland Corporation [ASX:SGP], a large home builder, is also experiencing tremendous growth. Stockland has increase statutory profits by 50.6% for H1 FY16.

But why are these companies taking off?

In the last 10 years Sydney and Melbourne property prices have jumped more than 92%. Yet it’s not just for residential builders. Australian building approvals made a huge jump this month. Building approvals are used to gauge construction activity. Building approvals can include anything from offices to apartments. And for the month of February building approvals shot up. Month on month approvals increased by 9.2%.

So if Australian property grows further, what can you do about it? One option is buy companies like Boral or Stockland. This way you will be directly exposed to the construction market. Another option is to buy REITs.

What are REITs? Put simply they’re a pool of different investment properties. They range from warehouses to residential homes. REITs offer diversification. Investors are able to expose themselves to the returns of the property market without owning property.

There are two primary ways REITs can create wealth. First: exposure to the value of real estate assets. Second: rental income provided by the property investment. In Australia we have A-REIT. The A stands for Australia.

The graph below compares the ASX 200 (brown line) and ASX 200 A-REITs (blue line).

A-REITvsASX200 10Feb16

Source: Yahoo finance

At first glance it’s easy to see that A-REITs have outperformed the market. A-REITs are up around 0.16% this year, while the market is below 8%. I’m not saying I can predict the future. But equity markets aren’t shaking off this global slump. I know where I’d rather have my money. A-REITs.

Härje Ronngard,
Junior Analyst, Money Morning

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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