The strength in the JHX share price in 2023 (up >50% relative to the S&P/ASX 200) has been premised on a peaking of US mortgage rates which recently hit 7% in the US. This is despite the prospects of FY24E earnings being below FY23 given the impact of higher interest rates.
Helping hold the story together has been the resilience of new US home sales which have provided a clear reference point for investors looking at underlying housing market conditions. The visibility of new US home sales is why investors have been so focussed on this data. Despite only 35% of JHX’s sales in North America going into new product channels.
65% of JHX earnings are exposed to the Repair & Remodel (R&R) or ‘renovation’ market as Australians call it. JHX in May 2023 expected the R&R market to be down -11 to 15% in 2023, which will have a significant bearing on earnings.
Recent activity surveys (measuring R&R is an imprecise exercise) suggest that R&R spend is holding up more strongly than JHX May guidance. NAHB quarterly housing survey released in July, had estimates of future activity being flat/down only smalls. Some sub-indices even showed improvement in the June quarter relative to the March quarter.
US website Houzz's large-scale quarterly survey of future residential renovation activity prospects has also shown a level of resilience through 2023.
If these trends for US renovation activity continue to be less bad than feared, upside risk to 2024/25E earnings for JHX is likely, from the most important part of JHX business – R&R. The market is currently assuming JHX earnings will decline by -9.5% in FY24E, before rebounding +9% in FY25E.
Could US Housing Renovation Expenditure Surprise to the Upside?
Figure 1: JHX’s May FY24 outlook had renovation spend down -11 to -15%
Figure 2: Elements of NAHB Remodelling Market Index has shown further signs of stabilisation in the June survey
Figure 3: US expected renovation activity indicator has remained stable in 2023, with a small uptick shown in the June survey period.
Figure 4: Market currently assumes JHX earnings to fall by 10% in FY24E, which could prove too conservative.
Figure 5. JHX PER now in line with long term average. Earnings estimates have been upgraded over the last 3 months. The first upgrades for over 12 months.
Investment View
Evidence of cyclical earnings recovery in US renovation spend would pose an upside risk to the JHX earnings and share price. At 21x PER, the share price is little priced in for a cyclical recovery in earnings. Retain the Buy.
Risks to Investment View
The recovery in North America Fibre Cement may be slower than expected while the Australian and European divisions could also take longer to recover. If higher interest rates persist, this may impact demand for building products in JHX’s markets. Competitive responses may challenge JHX’s market share position, forcing a response. EBIT margins may fall below the target of 25% for North America and Australia which could affect earnings.
Recommendation
We have retained our Buy recommendation.
