Australia | Nov 10 2021
This story features JAMES HARDIE INDUSTRIES PLC. For more info SHARE ANALYSIS: JHX
Renovations and sturdy housing markets have kept momentum going for James Hardie which continues to deliver on its its high-value product strategy.
-Competition likely to remain constrained for several quarters
-Highly favourable operating environment should allow for a higher multiple for James Hardie shares
-Adjacent products appear yet to gain desired traction
By Eva Brocklehurst
James Hardie Industries ((JHX)) continues to benefit from strong housing markets, particularly renovations, across Europe, Asia-Pacific and the US, where the company provides wallboards and exterior cladding.
Citi assesses, ultimately, the success of the company's strategy will not be known until the building environment normalises, although strong demand and shortages of materials are keeping momentum heading in the right direction.
Moreover, competition in the US should remain constrained over the next three quarters, at least, and Citi points to supply chain initiatives which have enabled the company's transformation. Louisiana Pacific over the next quarter will have to reduce capacity for maintenance, so the broker expects a strong result from James Hardie in what is usually a quiet period.
Supply chain constraints have persisted across the US for new building but it appears to Macquarie James Hardie has been more successful than its competitors, and there are fewer constraints in the renovations segment.
In the September quarter, lower volumes in North America were offset by better prices while there was momentum across Asia Pacific, with earnings (EBIT) margins of 30.8%, ahead of the guidance range. Around 40% volume growth occurred in European fibre cement, which Citi points out has positive implications for the future business in this region.
Credit Suisse too, was impressed with the first quarter which revealed margins grew despite cost inflation. Net profit guidance has been raised to US$580-600m for FY22 as margins prove resilient.
James Hardie has also retained its cost inflation guidance and reported a 70 basis points expansion in the EBIT margin, absorbing a 480 basis points increase in North American costs.
James Hardie has signalled a price increase of 5% across its North American products which Macquarie believes is indicative of the company's pricing power. FY23 volume estimates for the US are likely to be reached as Prattville ramps up and Summerville is re-started.
James Hardie is adding capacity in all three of its regions including fibre gypsum and fibre cement in Europe and a greenfield fibre cement facility in Victoria. Morgan Stanley notes capital expenditure for the expansions is included in management's -US$250-350m budget for FY22-24.
The strong performance in the year to date is balanced, in Credit Suisse's view, by the limited upside for volumes and margins, which are at the top end of both the company's targets and historical levels.
Yet, Citi considers the operating environment, being highly favourable, means the stock can achieve a higher multiple compared with historical levels, amid increasing exposure to renovations, which in turn will reduce the structural cyclicality.
The broker is less optimistic on adjacencies, noting the company's mixed track record. There is evidence adjacent products are yet to gain desired traction, with Citi noting fine textured panels are an example where James Hardie has had a product domestically for a number of years with little fanfare.
Despite the re-branding and re-launch of EasyTex, the broker believes traction is still in doubt. Nevertheless, the contribution of this product is considered relatively small in the scheme of things. Macquarie expects these textured panels will be slower to garner scale, but should start to impact volumes in FY23/24.
James Hardie is targeting a 66% "high-value" product strategy, centred on substituting Cemplank with Hardiplank, although the benefit of the substitution is likely to ease over time, UBS suggests.
Nevertheless, the broker believes the focus on high-value and high-quality leads is the right approach. UBS expects volume growth of 13% in the second half of FY22 and a FY22 US EBIT margin of 28.9%. Citi also hails the “value over volume” strategy, noting the shift in capital away from volume growth in the north-east of the US, an area which has proven difficult in the past.
Morgan Stanley observes internal initiatives are driving both top-line growth and strong margins. James Hardie stock offers attractive margins and access to attractive end markets, and the broker asserts there is plenty of upside in terms of market share growth.
In this way, the company provides a direct and quality opportunity for investors to access exposure to low interest rates, government stimulus and favourable demographics.
There is 90% share of the US fibre cement market already and, with fibre cement at an estimated 22% of new cladding, Morgan Stanley envisages plenty of opportunity for James Hardie to reach its 35:90 target (which involves fibre cement being 35% of new house cladding in the US and the company holding a 90% share).
FNArena's database has five Buy ratings and one Hold (Credit Suisse). The consensus target is $58.43, suggesting 7.3% upside to the last share price. Targets range from $51.20 (Credit Suisse) to $62.00 (Morgan Stanley).
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