Australia | May 20 2020
Momentum in new construction has carried James Hardie through to a strong start to FY21, although the full impact of the lockdowns is yet to be felt.
-Reason to be cautious on volumes even as economies re-open
-Lag in construction process likely to mean lockdown impact in Sept quarter
-Structural growth opportunities remain
By Eva Brocklehurst
James Hardie ((JHX)) delivered a solid start to FY21 as sales in April and early May have confirmed only a modest impact from the pandemic restrictions so far. Brokers assess early action by the company in the face of the pandemic has stood it in good stead.
New construction remains strong, still benefiting from the momentum at the beginning of the year. Nevertheless, this is likely to fade, as will the boost to do-it-yourself (DIY) interiors. UBS assesses the company has made the right decisions on cost reductions when preparing for the downturn and activity is holding up better than feared.
Still, there is reason to be caution on volumes, even as economies re-open. The pandemic has made consumers reluctant to have internal work done by outsiders and the net effect has been a drop in interior product volumes, given the technical nature of James Hardie's product application.
The company expects a US$20-30m earnings benefit in FY21 from recent actions undertaken to mitigate the impacts of the pandemic, but suggests recovery is unlikely to be sharp and probably have a long tail - described as a Nike-style “swoosh”, noting a high degree of volatility in the market.
Given the strong March quarter for US housing starts, growth in the June quarter should be very strong too, but Morgan Stanley points out the impact of the pandemic is altering the traditional lag in activity - as construction progresses from housing starts.
The broker suspects the impact of the lockdown is likely to be hardest in the September quarter, which means the current resilience may be only temporary.
While UBS lifts growth forecasts for FY21 for exteriors, a major contraction is still expected in US housing over the next two quarters at least. Citi agrees further disruption is likely, which presents downside risk to estimates.
James Hardie indicated order flow continues to improve and there are low levels of channel inventory. North American exteriors volumes were down just -3% in the first six weeks of FY21 and interiors down -15-20%, while Australian volumes were flat and Europe down -16%.
Price adjustments of 2-3% have been in place since April 1 and appear to be holding, Macquarie observes, also pointing out asbestos liabilities have increased, with the company now expecting more mesothelioma-related cross-claims in the future.
Citi notes North American operating cost have accelerated to double digits in the fourth quarter of FY20, estimating costs could have risen more than 20%. The working capital to sales ratio jumped to 24%, from 19% in FY19. Receivables rose 43%. Meanwhile, operating cash flow was boosted by lower cash taxes and the timing of asbestos payments.
Citi forecasts FY21 volume declines of -12% and an earnings (EBIT) margin of 23% in North America. Credit Suisse was reassured by the figures from North America and forecasts North American earnings margins of 25.9% in FY21, but tempers FY22 forecasts to 25.5%, assuming ongoing reinvestment.