BUY HOLD SELL – James Hardie (ASX: JHX)
James Hardie (ASX: JHX) is in the building and construction game. Its operating segments are North America, Europe Fibre Cement, and Asia Pacific Fibre Cement. The majority of its revenue comes from North America. Australia only accounts for ~11% of revenue.
It manufactures a range of fibre cement building materials for both internal and external use including: external siding, internal walls, floors, ceilings, soffits, trim, fencing, decking and facades.
In the United States and Canada, the largest application for fibre cement building products is in external siding for the residential building industry. As such, JHX’s share price performance is typically highly correlated with the US residential housing market and, in particular, new housing starts. The US housing market is expected to see a much stronger recovery before Australia, a recovery which is already underway.
It’s no surprise that an interesting chart to compare JHX to is US housing starts (volume). 70% of the company’s revenue comes from North America, so it’s a crucial relationship. JHX typically operates on a one quarter lag from housing starts, which means that the September quarter could encounter a greater impact on volumes from the downturn, although commentary regarding the improved trajectory provides some confidence this may not be the case. Housing starts in the United States are expected to be 1.15m by the end of this quarter and reach 1.21m in 12-months according to Trading Economics global macro models and analysts’ expectations.
The data is reported in an annualised format (monthly figure x12), if you were wondering why the orange bars (US housing starts) only reflect a number in the 100,000s. James Hardie share price the blue line.
Back home, the Federal government’s HomeBuilder scheme announced in June is anticipated to soften some of the downturn here, although forecasts suggest a trough only emerging in the September 2021 quarter, at 122,000 starts. Important to keep in mind that Australia isn’t really JHX’s key market.
The business has competently managed the disruption to demand well with long term expectations of continued improvement in market share remaining intact. Goldman is pleased by its ability to grow market volumes in North America while retaining margins. Most recently, JHX lifted guidance for the June quarter on the back of improved housing market activity in North America, pressuring analysts to call for the company to reinstate the dividend.
A strong first quarter in North America, enhanced focus on customer engagement to drive market share gains, and continued execution of lean manufacturing have been the keys for the business in the first half of the year. The business model is showing impressive resilience given the more than challenging macroeconomic backdrop.
- ROE is very impressive at 25.2%. Pleasing to see consistency in forecasts for FY2 and FY3 as well, both around 25%.
- Revenue and EPS growth is suffering in FY1, anticipated to improve significantly in FY2 and FY3 with earnings growth outpacing revenue growth.
- You are paying a premium for earnings on a forward PE of 27.9x. CSR sits on 14x, ABC on 15.7x and BLD on 21.1x.
- After JHX lifted earnings guidance for the June quarter, calls to bring back the dividend have become louder. For the moment, yield is nil.
- Of the 11 brokers that cover the stock, more than 80% have a BUY or STRONG BUY recommendation.
- It trades at a 7% discount to the average broker target price and a 32.3% discount to intrinsic value.
WHAT SORT OF INVESTMENT IS JHX?
JHX is on the hunt for market share, making it a growth play with the potential for an income kick as well. Construction as an essential service also adds a layer of defence to earnings. That said, it isn’t immune to the uncertainty caused by COVID, aggressively cutting costs and forcing the early closure of three factories.
A strong management system, with clearly defined and connected processes, continues to enable the very good execution of its strategic plan through the pandemic and associated volatile markets. Lean manufacturing initiatives, high impact innovation, improving market share and a strong balance sheet are its priorities.
The business has entered FY21 with impressive momentum in both commercial and Lean initiatives, albeit in a rapidly evolving and highly volatile market and economy.
Ord Minnett sees JHX trading close to fair value. Observes the building materials sector is experiencing lower than usual earnings in the current environment. Cites a proven business model and considers the business the best quality company in the sector. UBS believes the company’s performance through the depths of the pandemic supports the outlook for better long-term volumes and margins. Sees value following the recent rally and earnings upgrades. Macquarie considers the business well-positioned, pleased by the focus on efficiency, market share growth and innovation given the broader environment. Morgans Stanley holds a more bearish view, preferring infrastructure exposure while looking to avoid domestic residential construction.
SHORT TERM TECHNICAL VIEW
The stock is up 140% from its March low, currently 10% off its February high. It is one of the best performers in the Top 50 index since the market low. Resistance at 2900c is robust however. RSI is elevated, although not in overbought territory. If 2900c can be cleared, there is a pretty clear path up to 3200c.
Nothing groundbreaking to take away from top investor moves. Good to see Australian Super, increasing its position towards the end of June. A lot more buyers than sellers overall.
Short interest has convincingly moved lower from the end of last year. Currently, 0.84% shorted, down from 4.8% in September 2019.