The reticence to provide full year guidance for FY24 is understandable, but James Hardie is in a good position in the North American market where volumes are sliding. Our view is that the US housing market has troughed and operationally, JHX should be able to deliver on its 25%-plus EBIT margin promise.
FY23 result. Recent net profit guidance of US$600-620m although actual result was at the lower end at US$605.5m in line with consensus. Compositionally, the North American Fiber Cement division (NAFC) dominates group earnings. Volumes fell -14% in 4Q23 offset by an 8% lift in prices but the key ColorPlus product volume growth of just 2% in the final quarter was weak compared to the 9-month growth tally at +27%. Although 4Q23 EBIT of US$188.8m was slightly below consensus, the 29% margin was 200bp better than the same period last year.
In the Asia Pacific Fiber Cement division (APFC), 4Q23 price /mix growth of 12% was offset by a -10% volume fall resulting in net sales up 2% but EBIT at US$40.3m was significantly ahead of consensus at US$31.6m. Margins increased 282bp to 28.8% in the quarter compared to last year.
European Building Products ended a disappointing year with volumes down 12% in 4Q23, price/mix +14% and EBIT just in positive territory at US$8.5m, while margins were weaker at 6.7%.
The balance sheet has US$946m net debt with leverage at 1.0x slightly up on last year. JHX confirmed FY24 capex will be US$550m.
Investment View
We recently upgrade our recommendation to a Buy for JHX based on our view that the North American building products market is turning positive. JHX’s strong position in exterior and interior claddings, its improving relationships with home builders and its operational flexibility puts the company in a good position to increase earnings.
The company sees an uncertain global housing market outlook and only provided guidance for the first quarter of FY24. Even so, that guidance is for net profit of US$145-165m with NAFC volumes down -14% to -17% compared to last year. But with EBIT margin expected to be 28-30%, this is indicating the market may be underestimating the positive tone of earnings.
JHX is still guiding to 25%+ EBIT margins for NAFC and AFPC and mid-single digits for EBP.
JHX is very focused on market share gains, but they are equally zealous about maintaining EBIT margins above 25% for NAFC and APFC.
The company’s secret sauce is PDG or primary demand growth which simply means growth above the market. This is once again a key performance metric against which management will be measured. In FY24, PDG for NAFC and APFC is 400bp which is higher than the 3.4% PDG result in FY23. Management’s reference to a 400bp PDG improvement is approximately a 1% increase in fiber cement market share each year.
Management has been steadfast in its aim on 25%-plus EBIT margins, which has attracted some scepticism. They was suggested that a quarterly volume outcome of 600mmsf would yield a margin in the range of 25-27%. The market is certainly not anticipating an annualised volume decline of that magnitude.
We see the long term PE multiple for JHX around 19x so a cyclical upswing should force a market re-rate of this stock.
Risks to Investment View
The recovery in NAFC may be slower than expected while the APFC and European BP divisions could also take longer to recover. If higher interest rates persist, this may impact on 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 25% for NAFC and APFC which could affect earnings.
Figure 1: Strong margin performance in FY23
Figure 2: 10-15% volume decline for NAFC expected in FY24
