Company Reports

We maintain our AUD 51 fair value estimate for wide-moat James Hardie, with the shares trading at a modest premium. We make only minor adjustments to our near-term forecasts on updated guidance. We now expect flat volumes in fiscal 2024, improved against our prior estimate for a low-single-digit decline.

We raise our fair value estimate by 12% to AUD 51 per share, implying a price/earnings ratio of 22 times. We leave the wide moat, Morningstar Medium Uncertainty, and Exemplary Capital Allocating ratings unchanged. We still think shares in the wide-moat fiber cement company are overvalued, trading at a 13% premium to our upgraded valuation.

James Hardie's growth strategy includes marketing directly to homeowners, market share growth, and category expansion. We view this as rational and achievable, given past success. We estimate Hardie has about 90% market share in the fiber cement category in its main geography of North America, which contributes about 80% of group operating income. About two-thirds of North American EBIT is from repair and renovation, or R&R, and the remainder is from new house construction. We view the R&R market as less cyclical, with homes needing to be resided approximately every 40 years. According to the U.S. Census Bureau, about half of all houses are 40 years or older. As such, we expect a steady pipeline of homes requiring siding replacement or repairs through the next decade.

We have raised our fair value estimate for James Hardie by 6% to AUD 45.50, with the shares trading at a modest premium to that. Although we think fiscal 2024 will be a soft year for U.S. housing construction, we are now more confident in James Hardie’s ability to outperform competitors in the near term. James Hardie’s strong brand, which along with cost advantages underpins our wide moat rating, is driving market share gains at a time when higher interest rates and cost inflation are putting pressure on homebuilding. Customers are responding to James Hardie’s superior value proposition, and sales are benefiting from higher exposure to more resilient construction regions such as Texas. To reflect these tailwinds, we upgraded our fiscal 2024 revenue forecast by 6% to USD 3.8 billion, broadly in line with fiscal 2023, and lifted our medium-term and midcycle revenue assumptions. We also upgraded our margin forecasts to reflect disinflation of major inputs, namely freight and pulp, which caused our fiscal 2024 adjusted net profit after tax forecast lift 10% to USD 663 million, or USD 1.50 per share.

We increase our fair value estimate for wide-moat James Hardie by 13% to AUD 43 per share following a stronger-than-expected fiscal 2024 first-quarter result. About half of the increase reflects the lower Australian dollar/U.S. dollar exchange rate, now 0.65 versus 0.69 previously. The remainder reflects modestly stronger near- and longer-term margins in the United States and a less severe medium-term volume downturn, since the housing market is holding up better than we expected in early 2023.

After analyzing recent United States housing market data and industry commentary, we've made downward revisions to our near-term outlook for new residential construction, home prices, and repair and remodel spending.

Shares in James Hardie screen at a more than 20% discount to our fair value estimate. We think the market has become overly concerned about the impact of contractionary interest-rate policy on residential building and renovation activity in the United States. Here, we think the fundamental undersupply and ageing of residential property in the country should support demand for Hardie’s siding. Concerns around the broader economy provide an opportunity for investors to purchase an above-average quality, wide-moat business with robust long-term growth prospects at an attractive price.

We maintain our AUD 43.70/USD 32.20 fair value estimate for wide-moat James Hardie following fiscal 2022 results that were largely aligned with our expectations and management guidance. While segment results differed slightly from our forecasts, group underlying net income of approximately USD 620 million was expected.

We increase our fair value estimate for narrow-moat James Hardie by 4% to AUD 35.40 (USD 26.00) per share following the release of third-quarter results. Hardie had previously released fiscal 2022 guidance, so the strong third-quarter results were anticipated. However, the fibre cement siding company provided incremental guidance for fiscal 2023, which materially exceeded our prior forecast. Our fiscal 2023 net income forecast is increased by 19% to USD 770 million, sitting slightly below the midpoint of management’s USD 740 million-820 million guidance. The strength of the U.S. residential housing market and Hardie’s success in shifting its sales mix toward higher-value products being the predominant drivers of the uplift. We also slightly increase our full-year fiscal 2022 net income forecast by 2% to USD 626 million, toward the midpoint of management’s upwardly revised full-year guidance of USD 620 million-630 million. At our updated fair value estimate, shares in Hardie continue to screen at a material premium.

We maintain our AUD 34.20 per share (USD 25.00 per share) fair value estimate on James Hardie, following a transition in covering analyst. Also unchanged are its narrow economic moat, medium uncertainty, and Exemplary capital allocation rating. At current prices, shares screen as materially overvalued.

Narrow-moat James Hardie is off to a flying start in early fiscal 2022 despite substantial inflationary pressures in raw materials and freight which, year-to-date, have shown little sign of abating. Nonetheless, we expect the combination of robust North American fibre cement volume growth--in turn, driving improved operating leverage--continued realisation of cost savings under Hardie’ lean programme, and price hikes, to be sufficient to stave off inflationary headwinds in fiscal 2022. Accordingly, we increase our full-year fiscal 2022 net income forecast by 3% to USD 578 million. Our revised forecast sits slightly above the midpoint of Hardie’s upwardly revised full-year fiscal 2022 net income guidance range of USD 550 million-USD 590 million.

Policymakers are increasingly cognizant of the significant contribution from the manufacturing processes, transport and disposal of building materials to the carbon-intensity of our built environment. Assessing the associated degree of carbon-risk associated with many building materials is a complex task—for detail, please see our special report “Combatting the Carbon Intensity of our Built Environment” dated July 27, 2021.

Despite rising concerns about an affordability crisis, demand for new and existing homes continues to outpace historical averages. Strong nationwide demand for housing has outstripped supply, contributing to soaring home prices. While we agree that more homes are needed in the United States to accommodate household formations, we think some estimates of the housing shortage are too severe. For example, the National Association of Realtors and Rosen Consulting Group recently published a report that concludes that U.S. housing stock is undersupplied by at least 5.5 million units. To calculate this figure, the report compared average annual home completions during 1968-2000 (1.5 million) to the average pace of annual completions during 2001-20 (1.23 million). The difference between these two figures (0.276 million) is viewed as an annual deficit that has accumulated to a 5.5 million-unit shortage over the last 20 years. However, this approach doesn't consider that population growth has been on a downward trend since the late 1990s, nor does it account for demographic changes. Based on our calculations, which consider household formations and the historical ratio of completions to new households (1.16), we estimate the shortage is closer to 3.8 million units.

The Australian Government’s targeted and highly effective fiscal support of the residential construction sector leads us to materially upgrade our near-term outlook for housing commencements and alteration and addition activity. Certainly, housing-related stocks under our coverage are set to benefit from the recovery in fiscal 2022, boosting earnings and improving balance sheet metrics. But with fiscal support for the sector now winding down, the valuation benefit of our upgraded near-term housing commencement forecasts to our housing-related coverage is modest at best.

Home improvement spending during pandemic-stricken 2020 was atypical in two respects. First, households spent more time at home and allowed fewer contractors to enter homes (due in part to social distancing practices), causing a surge in do-it-yourself projects. Second, despite the pandemic-induced economic downturn, improvement spending increased across most product categories. Typically, demand for higher-priced discretionary products (for example, cabinets) wanes during a recession, but the combination of government stimulus, fewer discretionary spending outlets, and more time spent at home caused improvement spending to buck the historical trend in 2020.

James Hardie is poised for a strong finish to fiscal 2021, owing to resurgent U.S. residential home construction and remodelling activity and gains in North American market share which persisted at a hastened pace in the third quarter of fiscal 2021. With Hardie’s above market index growth, or PDG, momentum maintaining in late fiscal 2021--and the substantial strength observed in U.S. housing starts in late 2020--we raise our full-year fiscal 2021 net income forecast by 7% to USD 448 million. Our revised forecast sits toward the top end of Hardie’s upgraded net income guidance range of USD 440 million–USD 450 million. In turn, our upwardly revised near-term earnings estimates is the main driver of the 6% increase in our fair value estimate for the narrow-moat name to AUD 26.60 per share.

James Hardie Industries is the clear leader in fibre cement siding and internal lining products in North America and Asia-Pacific. After patenting cellulose-reinforced fibre cement in the late 1980s, the Australian company entered the North American market in 1990, establishing its business with the benefit of patent protection. In doing so, the company’s product line has become synonymous with the product category. The firm now enjoys 90% share in fibre cement siding in North America, its largest and most important market, with similar positions in Australia and New Zealand. More recently, James Hardie has entered the Philippines and European residential siding markets.

The impact of the coronavirus on Australian residential construction activity, house prices, and rental markets in 2020 has proven far less pronounced than we'd originally feared. Dwelling construction activity, house prices, and rents contracted during the height of the pandemic's shock to the Australian economy in mid-2020. However, a rapid reversal is now apparent in the final quarter of 2020, largely the result of highly effective fiscal stimulus directed toward the housing sector. Consequently, much-needed cyclical earnings relief is afoot for the building and construction materials sector. However, equity markets have already spotted the impending inflection point in construction activity and investor optimism abounds once more. With housing-exposed stock prices already incorporating the sector's imminent earnings recovery, we recommend investors look elsewhere in their search for value as the sector is likely to underperform in 2021. For further detail regarding our 2021 outlook on Australian housing, please see our report “Imminent Recovery Is Overbuilt Into Housing Exposed Stock Prices” dated Dec. 10, 2020.

Our long-term thesis for James Hardie remains unchanged following the delivery of a second-quarter fiscal 2021 result, which aligned with management’s prior guidance and tracked our full-year expectations. Accordingly, our full-year fiscal 2021 net profit forecast of USD 419 million remains unchanged with Hardie’s momentum in North American market share gains persisting into the second quarter. Our net profit forecast sits at the top end of Hardie’s reaffirmed full-year net profit guidance range. Nonetheless, we increase our fair value estimate by 5% to AUD 25.20 as Hardie’s strategy unlocks latent value from within the global fibre cement building products franchise.

James Hardie Industries is the clear leader in fibre cement siding and internal lining products in North America and Asia-Pacific. After patenting cellulose-reinforced fibre cement in the late 1980s, the Australian company entered the North American market in 1990, establishing its business with the benefit of patent protection. In doing so, the company’s product line has become synonymous with the product category. The firm now enjoys 90% share in fibre cement siding in North America, its largest and most important market, with similar positions in Australia and New Zealand. More recently, James Hardie has entered the Philippines and European residential siding markets.