Renovations and sturdy housing markets have kept momentum going for
-Competition likely to remain constrained for several quarters
-Highly favourable operating environment should allow for a higher multiple for
-Adjacent products appear yet to gain desired traction
Citi assesses, ultimately, the success of the company's strategy will not be known until the building environment normalises, although strong demand and shortages of materials are keeping momentum heading in the right direction.
Moreover, competition in the US should remain constrained over the next three quarters, at least, and Citi points to supply chain initiatives which have enabled the company's transformation.
Supply chain constraints have persisted across the US for new building but it appears to Macquarie James Hardie has been more successful than its competitors, and there are fewer constraints in the renovations segment.
In the September quarter, lower volumes in
Credit Suisse too, was impressed with the first quarter which revealed margins grew despite cost inflation. Net profit guidance has been raised to
James Hardie has also retained its cost inflation guidance and reported a 70 basis points expansion in the EBIT margin, absorbing a 480 basis points increase in North American costs.
Outlook
James Hardie has signalled a price increase of 5% across its North American products which Macquarie believes is indicative of the company's pricing power. FY23 volume estimates for the US are likely to be reached as Prattville ramps up and Summerville is re-started.
James Hardie is adding capacity in all three of its regions including fibre gypsum and fibre cement in
The strong performance in the year to date is balanced, in Credit Suisse's view, by the limited upside for volumes and margins, which are at the top end of both the company's targets and historical levels.
Yet, Citi considers the operating environment, being highly favourable, means the stock can achieve a higher multiple compared with historical levels, amid increasing exposure to renovations, which in turn will reduce the structural cyclicality.
The broker is less optimistic on adjacencies, noting the company's mixed track record. There is evidence adjacent products are yet to gain desired traction, with Citi noting fine textured panels are an example where James Hardie has had a product domestically for a number of years with little fanfare.
Despite the re-branding and re-launch of EasyTex, the broker believes traction is still in doubt. Nevertheless, the contribution of this product is considered relatively small in the scheme of things. Macquarie expects these textured panels will be slower to garner scale, but should start to impact volumes in FY23/24.
Strategy
James Hardie is targeting a 66% "high-value" product strategy, centred on substituting Cemplank with Hardiplank, although the benefit of the substitution is likely to ease over time,
Nevertheless, the broker believes the focus on high-value and high-quality leads is the right approach.
In this way, the company provides a direct and quality opportunity for investors to access exposure to low interest rates, government stimulus and favourable demographics.
There is 90% share of the US fibre cement market already and, with fibre cement at an estimated 22% of new cladding,
FNArena's database has five Buy ratings and one Hold (Credit Suisse). The consensus target is
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