Australia | Jun 23 2020
Once again James Hardie has provided a positive update, highlighting improvement in the first quarter, particularly in North America.
-Highly resilient and adaptable despite the downturn
-Stock still offers value despite the recent rally
-Underscores ability to grow US market volumes and retain margins
By Eva Brocklehurst
James Hardie ((JHX)) continues to provide positive surprises, with market volumes across all geographies improving in the first quarter. North America remains the highlight and the business appears to find areas to grow despite the lockdowns.
North American primary demand growth (PDG) is is tracking in excess of 7% and new housing construction has underpinned market strength, as the company benefits from the lagged effect of strong starts in January-March.
Management has noted that strength is emanating from new housing rather than renovations, and Citi considers this consistent with the feedback from the US homebuilders' data in April and May.
Professional renovation and DIY activity have also improved, but to a more moderate extent. However, UBS asserts the disruption from the pandemic on activity and channels means that traditional calculations of PDG are less reliable right now.
First quarter guidance for North American exterior volumes has turned around, to be up 0-2%, having been down -3% in April to mid-May. Australia is still flat, while the decline in Europe is better, now guided to be down -11-14% as opposed to down -16%. PDG should be supported by exterior remodelling work once restrictions ease further. Volumes in interiors have improved slightly but still remain down year-on-year.
Morgan Stanley believes the update reflects the company's remarkable resilience. James Hardie traditionally operates on a one quarter lag from housing starts, which means that the September quarter could experience a greater impact on volumes from the downturn, yet commentary regarding the improved trajectory provides some confidence this may not be the case.
The first quarter may benefit from some abnormalities, such as upside surprise on volumes from a reduced cost base that was more geared towards a severe downturn but, Goldman Sachs asserts, it also means that management is adaptable, particularly in terms of the scale of its investment in PDG.
The broker also assesses the US housing market is structurally sound, given the under build and favourable mortgage rate environment as well as a robust customer base.
North American pricing is also in line with expectations, which suggests the market has remained rational despite the downturn. Management has reiterated it will not pay dividends until there is greater certainty on the outlook, although the liquidity position has strengthened.
Fibre cement earnings (EBIT) margin guidance is in the range of 27-29% for the first quarter, ahead of the range issued in May. Citi believes there is scope for further margin improvement should volume growth in the US be sustained.
Credit Suisse, too, envisages no material uncontrollable costs that could push margins back down in the remainder of the year, while a strong performance in the business justifies the outperformance in the stock.
With EBIT margins of 300 basis points, supported by better-than-expected volumes, savings and operating excellence, UBS agrees the stock offers value despite the recent rally. However, the broker suspects pockets of the market may be wary of the recent outperformance, as this possibly signals downside relative to historical performance.