The inflation monster has enveloped James Hardie’s costs, eating into the otherwise very good revenue growth. This has caused the company to downgrade its FY23 net profit guidance even though the construction backlog will stick around until January 2023.
JHX reported 1Q23 adjusted net income of US$154.3 million, a 15% increase on the same period last year but was short of consensus forecasts. The company has taken the knife to FY23 guidance and now expects net profit in a range of US$730-780 million (previously US$740-820 million). The downgrade is in large part due to higher COGS (cost of goods sold) which is expected to be US$130-170 million, up from US$90-130 million. EBIT margin guidance has also been lowered and widened to 28-32% from 30-33%.
Long term capex guidance has been kept at US$1.6-1.8 billion. There is a clear acknowledgment that management will be flexible in how this is deployed in an uncertain macro backdrop. FY23f capex has been snipped by US$200 million implying a full year spend around US$500 million. The timeframe for spending the capex has also been extended to 5 years (from 4). Management remains set on staying ahead of the demand to avoid capacity shortages as occurred back in 2017. This is also consistent with a desire to increase market penetration.
Investment view
JHX is expecting construction backlogs in North America to persist until January 2023 with the addressable market softening from 4Q23.
Even with softer end market demand, management is expecting to generate volume growth.
The 1Q23 result did have a silver lining. The evidence is clear that the strategy to improve mix is accelerating. ColorPlus (C+) volumes in NAFC grew 31%, well ahead of the initial 25% growth target set back in May. C+ has quickly become around one quarter of total volumes indicating customers are seeing the value proposition. The mix benefits could be an antidote to a waning demand backdrop. The additional marketing spend in targeted markets is also working as these areas are outperforming the control group without the marketing attention. JHX has extended the marketing campaigns into three more metro areas, but as more C+ capacity is added, marketing spend will follow in support.
Our thinking still sees a lower volume outcome by FY24f, minimal price/mix, partially offset by a retracement in key input costs. Management is confident it can maintain volume growth and price/mix against a deteriorating backdrop. Even with a conservative outlook, we can see value in the stock, and we have retained our Buy recommendation.
Risks to investment view
Demand for JHX’s products may not achieve the growth or margin anticipated. Rising interest rates may dampen demand and lower consumer spending on housing products.
Recommendation
We have retained our Buy recommendation.
Figure 1: 1Q23Result
