Materials

James Hardie cuts guidance, launches US$200m share buyback

By Market Index
Tue 08 Nov 22, 12:05pm (AEST)
Buyback
Source: iStock

Key Points

  • James Hardie warns of a weaker housing outlook
  • The calendar year has been characterised by unprecedented levels of inflation, rapidly rising interest rates, slowing housing activity, global supply chain disruptions, and a war in Europe
  • Mangement has adjusted net income guidance range for FY23 to US$650m - US$710m from US$730m - US$780m

Despite offering a mixed bag result this morning, the market was quick to conclude that on balance James Hardie’s (ASX: JHX) second quarter update was a bit of shocker.

While updated guidance, which at its midpoint still represents 10% growth in adjusted net income versus the previous year, the materials giant was down -11% at the open after warning of a weaker housing outlook.

Uncertainties around a slowing housing market contributed to lower volumes across the cement maker’s key regions, and management lowered its adjusted net income guidance range for FY23 to US$650m - US$710m from US$730m - US$780m, after concluding that volumes will continue to decline.

Overall, global net sales jumped 10% to US$997.6m on flat volume and adjusted net income gained 13% to US$175.8m.

Global adjusted earnings (EBIT) increased +6% to US$218.5m with an adjusted earnings (EBIT) margin of 21.9%.

Deteriorating markets

What may have spooked the market more than the underlying numbers is the ‘significant change’ witnessed by management in the last 45 days as labour shortages and unfavourable weather constrained demand for its products.

Commenting on the second quarter result, CEO Aaron Erter reminded investors that the calendar year has been characterised by unprecedented levels of inflation, rapidly rising interest rates, slowing housing activity, global supply chain disruptions, and a war in Europe.

“… we are navigating this market uncertainty with a focus on controlling what we can control,” Erter noted.

“We plan to win regardless of market conditions, and we will continue to accelerate and expand our competitive advantages.”

Second quarter breakdown

  • North America Fiber Cement Segment net sales increased 18% to US$750.6m and earnings (EBIT) increased 17% to US$212.8m, with an earnings (EBIT) margin of 28.4%.

  • Asia Pacific Fiber Cement Segment net sales increased 7% to $211.1m and earnings (EBIT) decreased -7% to $56.1m, with an earnings (EBIT) margin of 26.6%

  • Europe Building Products Segment net sales decreased -2% to EUR102.0m and earnings (EBIT) decreased -69% to EUR4.4m, with an earnings (EBIT) margin of 4.3%

Outlook

Europe: While the European business continues to face significant headwinds from inflationary pressures and a slowing housing market, management expects the execution of its high value product mix strategy to underpin the ongoing transformation of the business.

North America: Based on the significant decline in market expectations, management now expects second half volume growth to be between -5% and -8%, versus the previous year, which is a significant reduction to August/September projections.

Australia: For the second half management expects volume growth to be between -4% and flat versus the previous year.

Buyback

Instead of paying dividends the company chose to deploy excess capital to shareholders via a US$200m ($308.7m) share buyback.

The buyback will end 31October, 2023.

Management notes returning excess capital in this way "provides a growth company the optimal flexibility to ensure investment in organic growth is prioritised while maintaining financial strength and flexibility through cycles".

"Through these cycles we will target an average leverage ratio below 2.0 times. "

What brokers think

James Hardie’s share price is down -38.5% over 12 months, and year-to-date is down from $55.67 to $33.39.

Consensus on the company is Strong Buy.

Based on Morningstar’s fair value of $43.06 the stock appears to be undervalued.

Based on the six brokers that cover James Hardie (as reported on by FN Arena) the stock is currently trading with 65.3% upside to the target price of $47.65.

Following today’s result, both Citi and UBS have retained Buy ratings on the stock, with target prices of $41.90 and $52.50 respectively.

While Citi believes the conversion of dividend to $200m buyback is a positive from a share price perspective, the broker wants greater clarity on the implications of a material downgrade on the FY24 result.

While US volumes and the expectation for lower margins contributed to a disappointing 2Q result, UBS still believes the company has the right strategy and with input costs starting to moderate, the broker anticipates margin recovery through FY23.

Broker updates later this week may surprise.

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James Hardie share price over one year.

 

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