Ord Minnett Research Recommendation: James Hardie (ASX: JHX)
James Hardie delivered a fourth-quarter FY22 underlying net profit of US$178m, up 42% on a year ago and 2.4% ahead of Ord Minnett’s forecast. This took the full-year figure to US$621m, towards the low end of the US$620–630m guidance range issued in February.
An unfranked final dividend of US30cps was declared, bringing the full-year payout to 70cps. This was in line with the previous year, but well below our 48cps forecast and Bloomberg consensus of 44cps.
The result highlighted a volatile path for FY23 margins. The first quarter is likely to be the weakest, given 1) expected peak commodity price inflation, 2) extra staff retention costs, and 3) June 2022 price rises are yet to flow through.
Commodity costs largely remain the key swing factor to guidance, and how long prices either stay at elevated levels or unwind will dictate earnings momentum in the near term.
Management is attempting to implement two price rises in FY23 after consultation with its key customers. We see this as a practical decision in a hyper-inflationary commodity price environment where competitors are attempting 2–3x out-of-cycle price rises, which will limit any immediate implications for demand. We forecast average selling price growth of 9.2% for the North America Fibre Cement division in FY23.
The company is also unexpectedly gaining strong traction in ColorPlus siding volumes. For James Hardie, Colorplus volumes grew 27% to 460m square feet in FY22 and could exceed the targeted 25%-plus in FY23. We estimate ColorPlus volumes will grow 35% in FY23, based purely on a combination of 1) expected 8% total exterior volume growth in FY23, and 2) delivering to management’s stated product mix targets.
The company’s outlook for FY23 is uncertain, although we have greater confidence given 1) a 10% increase in the volume order book in 1Q23, 2) a lengthening order file to 8–12 weeks from 4–6 weeks previously, and 3) appropriate price rises to tackle rising cost inflation. In our view, the stock represents attractive long-term value, while potentially offering double-digit EPS growth for the next two years. We recently upgraded our recommendation to Buy from Accumulate and increased our target price to $53.10 from $52.70.
Walter Watson
RESEARCH EDITOR
Walter is the Editor of Ord Minnett's retail investor publications, such as the Opening Bell, Ords Weekly and the Ords Monthly, along with various investment guides and investor information published by Ord Minnett.