James Hardie has shocked the market with a significantly changed outlook, particularly to its North American business. The housing market downturn has arrived sooner than expected, eliminating the anticipated backlog of work. We pull back our recommendation to Hold.
Aaron Erter was appointed as the new CEO for JHX in September and was followed by the appointment of a new Chairperson, Anne Lloyd in November. While the sudden change in market outlook cannot be laid at their feet, investors will be wary about a second earnings downgrade in short order that brings into question the validity of JHX’s outlook.
Mr Erter noted the changing macro-environment as inflation and interest rate rises coincide with a slowing housing market amidst supply chain disruption. Mr Erter said, “Over the past 45 days, we have seen a significant change to the outlook of housing market activity for the second half of our fiscal year”. He noted the significant slowdown in single family homes in the US and a moderation in the repair & remodel market. In Australia, labour shortages and bad weather are constraining activity, but a backlog of activity remains entrenched. The European businesses face a similar cocktail of headwinds. Mr Erter added “We see a weakened housing market for the remainder of our fiscal year, softening volumes in all three regions we participate in.”
The changed environment has led JHX to downwardly revise its FY23 net profit guidance to US$650-710 million (previously US$730-780m), due to an expected 5-8% decline in 2H23 volume in North America.
The changed macro has logically brought JHX’s market position into question. Management remains resolute it is not losing market share. The company’s strategy is to prioritise growth above the addressable market.
JHX’s 1H23 operating cash flow was down 26% compared to last year due to rising inventory and lower accounts payable in North America and Asia-Pacific. Net debt is up 12% to US$843 million but leverage remains in-line at 0.8x. JHX has announced a US$200 million buyback in lieu of paying an ordinary dividend in a change of capital management strategy.
Investment View
The market will have lost confidence in the outlook for JHX now that the US housing market has turned down more swiftly than the company or anyone realised. We lower our recommendation to Hold.
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 lowered our recommendation to Hold from Buy.
Figure 1: 2Q23 result
Figure 2: jhx relative to S&P/ASX200 in periods of rising bond yields
Figure 3: jhx per vs us 30-yr mortgage rate
