23 November 2019
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James Hardie cements its market dominance

Andrew Main
16 August 2016

By Andrew Main

In Australia’s equity investment world where most of the action is inwardly focussed, James Hardie Industries is a company whose offshore operations take it off the radar to an unfortunate extent.

Historians, sceptics and mesothelioma victims know all about the dire history surrounding the 2001 restructure and move to the Netherlands, but such background tends to skew people’s perception of a company that is now a US and world leader in a thoroughly useful building product.

Namely, fibre cement siding and backerboard, which are huge in the US residential building market.

The Dublin based (it’s complicated) company turned in a quarterly report last Friday that didn’t really set the heather on fire, but has subsequently seen six broker reports - two of which were upgrades and three recommendations, against one “lighten”. Basically, the brokers like the stock, which is now trading above $22 a share, up from a price just below $15 last November and below $11.50 late in 2014.

Take a bow, the US dollar exchange rate. The stock’s main business is in the US; it reports in the US dollar and it’s also traded there. So to a great extent, it’s an exchange rate play.

And we know how that’s been going; it was all a bit nerve racking when the two currencies were around parity, but at current mid-70s levels, it’s a thing of beauty.

The quarter was nothing if not solid: net profit up 5% compared to the previous corresponding period at $US66.7 million, EBIT up 9% at $US97.6 million, and sales up 12% at $US477.7 million.

One eye-catching element was just how dominant the North American fibre cement market is for the company.

Sales in that geography of $US370.3 million were more than three quarters of the company’s total sales of $US477.7 million, with an EBIT margin in North America of just over 25%.

One of the joys of Hardie presentations is CEO Louis Gries, a laconic southerner who makes it clear he’d much sooner be turning out millions of yards of fibre cement in multiple locations than briefing pesky analysts.

He’s a Louis as in Louis the Fourteenth, but clearly long ago gave up trying to get Americans to pronounce it and he’s effectively Lewis nowadays.

That economy of style and his all round lack of flash is probably why they like him and why the share price put on more than a dollar on Friday, even if it’s subsequently eased back slightly.

By the way, on July 29, the company announced that the boss of its US operations, Ryan Sullivan, “will be leaving James Hardie effective immediately” which doesn’t sound too chummy, but the company barely missed a beat because it then announced that Gries was assuming direct responsibility for that part of the business.

He hosed down any excess exuberance among analysts by forecasting a slightly lower range of net operating profit for the current year than they had been.

They’ve got (or had) $US264 million to $US302 million as a range, whereas his management says it will be more like $US260 to $US290 million.

That assumes business as forecast and a steady exchange rate, which probably won’t happen, but is the safest way to look into the future.

The comparable number for the year to March was US$242.9 million.

You have to look twice at some of management’s statements to see how good the outlook actually is, not to mention how damn big the market is.

“The Company expects to see steady growth in the US housing market in fiscal year 2017, assuming new construction starts between approximately 1.2 and 1.3 million.

“We expect net volume growth for the North America Fiber Cement segment to likely outpace overall market growth by mid-single digits.

“We expect our North America Fibre Cement segment EBIT margin to be at the higher end of its stated target range of 20 per cent to 25 per cent for fiscal year 2017,’’ they noted.

Meaning, the US housing market is bouncing back, but they are confident of bouncing further.

Among local brokers, Citi’s put it up to Neutral from a Sell, and Credit Suisse has pushed it a notch higher from neutral to outperform.

Deutsche has it as a buy, Macquarie as an Outperform, and Morgan Stanley says the same only different by labelling it “Overweight”.

The only dissenter is retail broker Ord Minnett, which notes that the EBIT earnings margin in north American fibre cement has come down by 270 basis points to 25.5%. That’s a glass-half-empty view, given how most building products suppliers would love to see a margin like that, but the Ords analysts back that up by noting that the decline has come about thanks to “a combination of increased discounts and rebates and investment in capacity”.

“While investing in growth is considered a sensible strategy, the broker maintains that the share price already factors in delivery of the company’s objectives.’’

Looked at from an Australian retail investor’s point of view, the stock looks fully priced on a current year PE of between 25 and 27 times, in a situation where the dividends aren’t franked because tax is paid offshore.

But it’s very well established, it’s a great leverage play to the US market, and strong profits mean bigger payouts to the longsuffering claimants on what’s called the Asbestos Injury Compensation Fund (AICF), the scheme by which a threshold amount of free cashflow must go to compensation.

On July 1, the company made a payment of US$91.1 million to AICF, representing 35% of its free cash flow for the financial year just ended.

By comparison, the company paid out $US62.8 million in the previous 2015 year, and $US113 million in the 2014 year.

Asbestos claims are finally starting to ease, decades after Hardie produced its last asbestos product, but the AICF is still dependent on a line of credit from the NSW Government and the central actuarial estimate of the overall liability still sits at $2.03 billion, down $112 million from the equivalent 2015 figure.

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