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James Hardie Earnings: Fair Value Estimate Up With Stronger Outlook and Weaker Australian Dollar

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We increase our fair value estimate for wide-moat James Hardie JHX 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.

Adjusted net profit of USD 175 million was 13% higher than the prior corresponding period and a record for the first quarter. The strong brand, which alongside cost advantages underpins James Hardie’s wide moat, enabled higher prices despite year-on-year volume declines. We think this reflects the brand and pricing power of the business. Adjusted group EBIT margins expanded to 25% from 21% in the previous corresponding period. Deflation from pulp and freight, alongside the price increases, supported first-quarter margins. The easing cost tailwind should continue for the rest of fiscal 2024.

The shares are up nearly 15% on the result, and we think they are modestly overvalued. James Hardie is a high-quality company with an attractive growth outlook. However, with a prospective fiscal 2024 price/earnings of 22 and no yield, the shares appear richly priced. We are somewhat surprised that the market is so bullish, given some of the risks around demand, inflation, and interest rates. The shares have recovered strongly.

James Hardie now expects its North American addressable market—a blend of new construction and repair and remodeling—to contract around 12% in fiscal 2024, an upgrade on the 14% guidance at the end of fiscal 2023. We forecast James Hardie’s North American volume to decline 8% in fiscal 2024 (from a 14% decline previously) as we now expect further market share gains.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Mathew Hodge

Director of Equity Research, Australia
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Mathew Hodge is director of equity research, Australia and New Zealand, for Morningstar Australasia Pty Ltd, a wholly owned subsidiary of Morningstar, Inc.

Hodge joined Morningstar equity research via the acquisition of Aspect Huntley and was previously a director on the team from 2019. He has approximately 20 years of experience, primarily covering the metals and mining sector. In addition, Hodge has sat on Morningstar's economic moat committee since 2014. More recently, he led the refresh of our capital allocation methodology in 2020 and chairs the subsequently formed capital allocation committee. In 2001, Hodge joined Aspect Huntley, which was acquired by Morningstar in 2006.

Hodge studied mining engineering at the University of New South Wales and previously worked in mining, principally as a mining engineer in underground coal. He holds the Chartered Financial Analyst® designation.

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