James Hardie may be without a permanent CEO at present, but the business is still performing admirably in challenging conditions. The full year profit was modestly below consensus while the full year dividend of US70cps was the same as FY21.
NAFC revenue guidance for FY23f lifted to +18-22%. EBIT margin guidance was retained at 30-33% implying an EBIT upgrade of about 1.7%. Most of the revenue increase can be attributed to price where the price/mix guidance was increased to 9-12% from 7-10%. This is due to a second price increase that became effective on 20 June 2022.
Volume growth in NAFC is bouncing along at a run-rate of 10% but given the lag between cost inflation and price recovery, the EBIT margin outcome will hit a low point in 1Q23f. This will likely be an ‘outlier’ in the sense that FY23f is expected to enjoy an improving margin as price increases gain traction.
The new CEO announcement is a slow burn. JHX is certainly taking its time over the appointment of the new permanent CEO. A decision is expected before the end of September with both internal and external candidates in the running. The long timeframe for this appointment has not hurt the operational performance of the company indicating a well-oiled machine is awaiting the next boss.
The ColorPlus strategy is finally adding some impact. It has taken a few years for this initiative to gain traction, but the C+ growth is now outpacing average divisional volume growth. In the three metro areas where marketing initiatives were implemented, growth exceeded 30% which was about 11ppts higher than in non-marketed regions. With an expanding marketing program underway in the Midwest and Northeast, volume growth for C+ should reach 25% in FY23f, paving the way for further mix benefits.
Higher inflation will not dent FY23f guidance. Only three months ago, the cost of goods was forecast to increase by US$40-60 million, but this has now been revised to US$90-130 million. This is on a total cost base of US$2.3 billion (FY22 COGS). Management has announced another 4% price increase in North America for June 2022 which should add approximately US$60 million revenue, potentially offsetting the expected cost increases.
Investment view
JHX’s FY22 net profit of US$620.7 million was within the guidance range and the company has reaffirmed its FY23f guidance of US$740- 820 million.
Despite the apparent softening of margin performance in NAFC early in FY23f, we expect the full year to be solid. A new CEO may not need to change very much to keep the earnings growth going.
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.
