Australia | May 27 2021
This story features JAMES HARDIE INDUSTRIES PLC. For more info SHARE ANALYSIS: JHX
James Hardie has outlined an integrated US marketing plan directed at the consumer in order to expand its addressable market
-Integrated marketing plan to capture consumer interest
-New James Hardie products to enlarge the addressable market
-Targeted marketing aims to overcome resistance to panels
By Eva Brocklehurst
The focus was on the consumer at the James Hardie ((JHX)) investor briefing with new products and a marketing campaign expected to drive demand for renovating exteriors among US householders.
Citi finds the initiatives strategically sound but expects time will be required for implementation, even though early sales trials indicate a high level of acceptance of the products. While the initiatives position the business for growth, at a forecast 25x FY22 PE ratio (price/earnings) the broker sticks with a Neutral rating.
Additional details been provided around the net profit guidance of US$520-570m issued at the recent FY21 results while primary demand growth is expected to remain at 6-8%.
UBS is pleased the new initiatives are in addition to the original target of 35/90 (35% US market share for fibre cement, currently 17%, and James Hardie retaining 90% share) and, as the goalposts are set, execution is now key.
The company has extended its cost savings program, anticipating US$340m in cumulative savings over FY22-24 relative to the US$107m delivered in FY18-21. UBS expects these revised targets will translate to an annual incremental cost saving of around US$63m over the next three years. This should help offset some expected cost pressures.
Morgan Stanley believes the business is set to continue delivering growth above the market and maintain attractive margins, assessing new targets for FY22-24 could mean an additional US$60m in annual benefits as a run rate in FY24.
It's the systematic approach the company takes to positioning its business Macquarie likes, potentially allowing the expanded product line will take the business beyond the traditional 35/90 share measurement in the US.
The broker calculates the addressable market effectively doubles with the inclusion of all non wood-look surface offerings. A targeted marketing strategy will add to both the demand and the ability to secure more of the value potential.
Citi acknowledges should the uptake of new products be faster than it assumes there could be upside to estimates, while Macquarie asserts that market is yet to capture the opportunity of this potential expansion in its financial estimates.
Based on its analysis, Macquarie envisages James Hardie adding 9% to its North American sales volumes. Yet sizing up the market is not that easy, the broker concedes and substitution will not be straightforward.
The company is concentrating its marketing efforts on a 35-54 year-old female customer, dubbed 'Christine', who is at the head of the household decision making, expecting to generate consumer interest rather than builder interest necessarily, and in doing so gain greater control over the value proposition and visibility on the supply chain.
James Hardie expects to lift the high value-added product sales mix to 66% of revenue in the US over FY22 and will hire a national social media "influencer" to complement regional influencers that have been already secured.
Macquarie assesses, from builder discussions, that overcoming existing aesthetic shortcomings inherent in panels will be a key constraint. Despite the cost benefit, stucco still achieves a uniform surface that is harder to achieve with panels.
James Hardie is confident it can overcome this with marketing and will spend around US$45m on its campaign.
The Hardie Textured Panels in the US and Hardie Fine Texture Cladding in Australia are expected to compete with traditional alternatives such as stucco and rendered brick and incentives will be used to drive increased share.
Fibre cement is considered a good alternative to stucco/brick as it is easier to install, less labour-intensive and reduces installation costs by around -20%. As the market is currently experiencing an acute labour shortage the need for alternatives has increased and this bodes well for the company's products.
Furthermore, James Hardie has noted there are around 44m homes in the US that are over 40 years old and these could benefit from refurbishment. Gaining a 5% share of this market would translate to re-cladding around 2.2m homes.
This compares to the new housing market in the US where around 1m single-family homes are constructed each year, of which the company holds a 20% market share.
Macquarie notes the European opportunity was not emphasised in the briefing, although management intends to leverage innovation in order to displace the render market, which represents around 40% of the exterior wall covering share in Europe.
FNArena's database has four Buy ratings and two Hold. The consensus target is $45.94, signalling 7.2% upside to the last share price. Targets range from $39.80 (Credit Suisse, yet to update on the briefing) to $50.00 (Morgan Stanley).
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