Slowdown hits Australian builders

Boral, Australia's biggest seller of building materials, reported its first profit decline in five years as a drop in housing construction cooled demand for its products. The company's shares had their biggest slide in almost two years.

Net income in the six months to December 31 fell 3.3 per cent to A$179.7 million ($196.6 million) from A$185.8 million a year earlier, the Sydney-based company said in a statement to the stock exchange yesterday. Sales rose 4 per cent to A$2.2 billion.

Managing director Rod Pearse said second-half profit would be comparable with the first half as demand slows in Australia, where the central bank raised interest rates twice in late 2003 to cool the fastest mortgage lending in 23 years. The bank yesterday said the likelihood of a further rate rise in the months ahead had grown.

"Boral shares have risen alongside the housing boom, but the effects of the interest rate increases on construction are now becoming apparent," said Rob Patterson, who holds Boral shares for the A$1.6 billion he manages at Argo Investments in Adelaide. "You'd have to be very cautious about building stocks now."

The company's shares fell 34Ac, nearly 5 per cent, to close at A$6.77.

The stock gained 35 per cent last year and has more than doubled since Origin Energy, majority owner of Contact Energy, was split off in 2000. Yesterday's decline in profit is the first since Origin was spun off.

Boral's A$179.7 million profit includes A$11.3 million of costs related to its failed takeover of Adelaide Brighton. Without the charge, profit rose 3 per cent to A$191 million.

"There's nothing specific these guys have done wrong, it's just they're in a slowing environment," said Lee Mickelburough, who helps manage the equivalent of A$13.3 billion at Perennial Investment Partners in Melbourne. "The market has probably underestimated what an impact a slowdown has on these cyclical businesses."

Building approvals in Australia, where the company got 76 per cent of first-half profit, fell 15 per cent in the six months to December 31 from a year earlier, Boral said. Sales from Boral's Australian building products division was unchanged from the prior half at A$618 million, with price rises making up for falling sales of bricks, roofing products, plasterboard and timber.

"Since July 2004 we have experienced a notable slowdown in Australian dwelling activity, particularly in our largest market in New South Wales," Pearse said in the statement. "In Australia we anticipate continued softening in housing in the June half as lower approvals flow through."

Boral had previously forecast that full-year underlying profit would be up 5 per cent on last year's record A$370 million, but Pearse declined to reiterate that yesterday.

UBS analyst Mark Ebbinghaus said Boral was taking a cautious approach to its outlook.

"There's nothing that we feel too concerned about," he said.

But he said the first-half result was a little worse than expected.

Earnings before interest and tax at Boral's US business rose 10 per cent to A$66 million.

The value of construction work started in US states in which Boral operates rose 2 per cent in the half.

Profit at Boral's Asian business fell 41 per cent to A$10 million because of weaker demand at its plasterboard joint venture with Lafarge. Boral said the joint venture would build two new factories in China for about US$30 million. The investment by Lafarge Boral Gypsum in Asia Ltd will double the joint venture's plasterboard production to 70 million sq m a year.

The benefit of price rises for Boral's Australian construction materials unit, such as concrete and cement, were offset by higher fuel costs. Revenue for the division rose 4 per cent in the half to A$1.1 billion, boosted by sales in Queensland, Victoria and Western Australia states.

- BLOOMBERG, AAP