Investment Matters

Company News

Australian Equities Portfolio

Emeco announced that ratings house S&P Global Ratings has upgraded the company’s credit rating and senior secured debt from “B+” to “B”. S&P noted that the company’s proposed acquisition of Pit N Portal should diversify its operational and commodity exposure. The announcement is subsequent to a similar ratings upgrade from Moodys’ several weeks ago.

The upgrade in the company’s credit rating should assist when the company comes to refinance its existing debt.

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Boral

Boral provided an update to the market with respect to its North American windows business and anticipated earnings.

The impact of the financial irregularities the company identified in its North American business was in line with expectations.

Boral expects a reduction in operating profit (EBITDA) for 1H FY-2020 of 6%, broadly in line with its guidance of 5% lower earnings (prior to the impact of Windows and excluding the positive impact of the new leasing standard).

In line with challenging conditions in Australia (bushfire and weather-related volume and cost impacts), the impact of the windows business, as well as the delay of several major projects in the second half of FY-20, the company expects operating profit to be lower in FY-20 than in FY-19.

The company has also announced the retirement of its CEO and Managing Director, Mike Kane.

While we anticipated near term weakness in housing starts and construction activity, irregularities with the company’s Windows business and the impact of natural disasters were unforeseen. However, we entered the investment with an understanding that the company’s acquisition of Headwaters may have been less value additive than implied. Furthermore, the retirement or Mr Kane, while reflective of near-term challenges, may ultimately be beneficial to shareholders in the long term, enabling greater creation of value from the company’s assets.

We understood that the company may have faced some near-term challenges, and thus built a small position in a measured manner and at a conservative entry price that we felt reflected much of the potential downside ($4.60 vs current price of $4.72). We will look to add to the position at prices that balance the company’s short-term challenges with its long-term exposure to fiscal stimulus and infrastructure spending.