Australia | Mar 20 2009
By Andrew Nelson
After running up 46% from its lows earlier in the month, at least two leading stockbrokers are now thinking enough is enough for James Hardie shares. All up, the stock has posted a 27% one-month gain, but both Deutsche Bank and UBS think there is still way too much downside to support any further gains.
In Deutsche’s view, the company continues to face numerous and significant headwinds. To name a few: weak US housing, the potential for even more tax issues and the flow-on impact of not being able to make payments to the asbestos fund. The broker notes that despite stronger than expected US housing starts data released earlier this week, there is still little to no evidence that the US housing market has actually stabilized.
The bounce, says the broker, predominantly relates to multi-family increases, with existing and new inventory levels remaining high. UBS concurs, confirming the key problem for US housing is the excess inventory of unsold vacant homes. And this, says the broker, is yet to show any decline. Although, many other indicators such as affordability, new home inventories and home sales are improving.
Still, US house prices are falling as fast as ever and the barrage of foreclosures has not slowed.
UBS points out the 30% decline in housing starts over the last three months is yet to be reflected in earnings. So there is still some unrealised downside to come, which leads the broker to predict the first year of earnings growth probably wont be until FY11 at the earliest. The broker finds it difficult to see any sort of sustained share price recovery without the support of earnings, or at least a genuine market expectation for some sort of earnings support.
On top of this, the company is currently contesting several taxation charges that include a $189m potential liability relating to a 1999 amended Australian taxation assessment and another US$98m in relation to the US. But wait, there’s more. The broker also notes several other large potential costs, which include the group’s proposed restructure, as well as any appeals in relation to the ongoing ASIC investigation. If any of these issues ultimately requires payment, then the broker thinks the asbestos fund will end up being under-funded.
Deutsche sees it as a 50% likelihood the company will be required to pay each of the 1999 amended taxation assessment and the US IRS notice of proposed adjustment. That’s $287m that the company will need to come up with and as mentioned, it will likely come at the expense of the asbestos fund. If this happens, the broker thinks the company is going to have to borrow to support the funds, as cutting back payments to the asbestos fund will likely land it in a big pile of political trouble in Australia.
The broker also thinks the bulk, if not all of the restructuring costs could land this year as well. Management had previously undertaken to simplify its current corporate structure, with the unwinding of its NV (Naamloze Vennootschap, Netherlands structure) a likely outcome. When this was proposed back in 1998, the cost worked out to $35m. However, based on the same estimate with CPI factored in, the broker estimates the cost of restructure could be up to $50m.
It’s not all bad news though, with UBS continuing to see long term value in the stock. Deutsche also names quite a few potential upside risks. These include the possibility of higher pricing outcomes in the US, better penetration in key markets, better margins than currently expected, and a better than expected outcome on the company’s various tax issues. And to clutch at a straw or two, Deutsche Bank also thinks there is a remote possibility for a faster than anticipated turnaround in US housing.
But until such a time, the stock has run too high, earnings are likely to remain under pressure, money will likely continue to bleed from the coffers and housing in both Australia and the US won’t be getting better any time soon. Deutsche has downgraded to Sell from Neutral, while UBS has also finally buckled, downgrading from Buy to Neutral. The average target price in the FNArena database is $3.82, which is well below the current price, while the stock garners 4 Sells, 3 Holds and 2 Buys.
As at 11:13 this morning, shares were 21c lower at $4.04, with a twelve-month trading range of $2.89 to $7.04.