The new plan to unlock a $1b property play at Boral

Chanticleer

Chanticleer

Seven, John Wylie and Perpetual all have advice on how to fix Boral. Now an activist investor has devised a strategy to unlock a $1 billion property portfolio.

Updated

You have to feel a little for the new Boral chief executive, Zlatko Todorcevski.

Like that brave soul who has bought that rundown pub on the corner, he’s quickly realised everyone’s got an idea on how to fix the place up.

Ryan Stokes’ Seven Group, which emerged as a major shareholder in June and has since amassed a stake of almost 20 per cent, has perhaps the most advice to give; this week Seven started a push for a board seat.

Boral has 2800 hectares of property in its portfolio, which one activist investor says could be worth more than $1 billion.
 Ben Rushton

Capital markets legend John Wylie, who is on the share register with his investment vehicle Tanarra Capital, has already offered plenty of advice.

Perpetual, led by head of equities Paul Skamvougeras, is another investor not shy about making its views known.

Now we can add another name to the list: activist investment firm Sandon Capital.

Chanticleer can reveal that Sandon met with Todorcevski last week to share a different perspective on Boral’s renovation.

Sandon supports the broad thrust of Seven, Tanarra and Perpetual, which have pushed for Boral to sell its US assets – particularly the Headwaters empire acquired in 2016 by former CEO Mike Kane for $3.5 billion – and focus on its strong Australian building materials division.

But Sandon believes there is a way to unlock even more value from the Australian operations, by separating and ultimately demerging Boral’s valuable property and related assets.

“There are a lot of hidden assets that we simply don’t believe the market appreciates,” says Sandon founder Gabriel Radzyminski.

“The risk is that if a company remains as undervalued that we think Boral is, it’s inevitable that someone will decide one day that Boral is worth a stab.

“And someone could afford to pay a hefty premium and still be able to almost steal the company.”

Sandon sees two big opportunities inside the Australian business.

The first is around aggregates – sand, gravel and crushed rock – where Sandon argues Boral has a market position that is underappreciated by the market and has possibly been undervalued by Boral itself in the past.

The materials are scarce and becoming more so. Boral owns 67 quarries in attractive locations close to key demand centres and is sitting on between 20 and 50 years of reserves around Australia’s big cities.

Radzyminski argues the size of those reserves makes the earnings from this business almost like an annuity stream. “Because as long as Australia chugs along, there will be demand for aggregates in major cities. You can’t build without them.”

But Sandon believes Boral hasn’t been as aggressive as it could have been, and can still be, in pushing up prices for aggregates given its market position.

Sandon’s more radical idea is around property. Boral’s landbank – which includes old quarries and current facilities in its vast network – has long been a source of profit, generating about $700 million in earnings before interest and tax since July 2001.

Sandon argues the market is not only undervaluing the portfolio of 2800 hectares of property, but it is also missing the opportunities to extract further value from it.

A huge site at Penrith Lakes in Sydney’s fast-growing western corridor is an example of a profit pool waiting to be unlocked with the right zoning changes.

Distribution sites closer to the city could also have much more value in the hands of developers.

But the best model for the potential value that could be unlocked is in Deer Park in Melbourne, where Boral sold an old quarry to Cleanaway Waste Management for $165 million in 2015.

The deal also delivered Boral a long-dated earnings stream of fixed payments and volume-based royalties for the life of the landfill.

We know the royalty started out at $15 million per year, and has escalated. But exactly where it stands now is unclear.

Regardless, Sandon believes Boral’s royalty and land bank at Deer Park could be worth between $800 million and $1 billion, or between 65¢ and 80¢ a share. Boral stock was trading at $4.16 on Wednesday morning.

At a conservative estimate, Sandon argues the property business as a whole, with this royalty deal and potentially other similar ones included, could be worth $1 billion.

Radzyminski appreciates that any demerger would take some time. But he argues Boral could put in place a functional separation of the capital-lite property and royalty division from the capital-heavy construction materials business, to better demonstrate the value of the former.

Don’t expect this to be an activist push that turns abrasive. Radzyminski describes the engagement with Boral as exemplary and said the firm’s meeting with Todorcevski was productive; the new Boral chief might not have agreed with all of Sandon’s ideas, but he’s clearly impressed many shareholders with his willingness to listen.

Sandon will now engage with Boral’s other big shareholders on its plan, while the market now waits on the results of the strategic review, due next month.

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