Following FY22 results that met the consensus forecast for
-FY22 results for
-FY23 profit guidance maintained
-Repair and remodel exposure reduces housing downturn impact
-A shift to higher value products and price increases
-Full year dividend disappoints
The share price of market darling
Some brokers now see positive signs following FY22 results that broadly met the consensus expectation, and after management reiterated FY23 profit guidance.
The company's fibre cement products are used in a variety of commercial and industrial applications including new residential construction, manufactured housing and repair and remodel (R&R) markets.
Given James Hardie's skew towards these less affected R&R markets, Morgan Stanley feels overall housing market weakness has been unfairly priced-in to the current share price and upgrades its rating to Overweight from Equal-weight.
Management regards strong R&R markets as a key driver for the outlook, as well as a continued shift to higher value products, manufacturing efficiencies and price increases. The
For the fourth quarter, Macquarie liked the
The final dividend of
Citi expects the majority of FY23 growth should be more driven by bottom-up initiatives rather than the macroeconomic backdrop. The analyst maintains a Buy rating and forecasts earnings growth well in excess of the ASX200. Given the currently low multiples, there's also estimated to be a reduced chance of a material decline in valuation.
While the broker has gained some comfort from the current resilience in R&R markets, there is still caution surrounding rising interest rates and anticipation for some R&R softness in the second half of 2023. As a result, Citi's target price slides to
Meanwhile, the Buy-rated
Not everyone was convinced. Credit Suisse retains its Neutral rating and believes the market won't re-rate the company's prospects until the macroeconomic environment improves and feels the company's above-trend margins present a risk.
The shift to value and reduced variability
The shift to value is very evident in the FY22 result, according to Macquarie. While volume growth softened as the base firmed, average selling prices accelerated, partly due to 27% growth in Colorplus volumes.
The broker notes management is remarkably optimistic about R&R market conditions and its own ability to execute an ongoing shift up the value curve.
Meanwhile, Citi highlights reduced variability in the business. Traditional sources of uncertainty like manufacturing performance have been offset by the LEAN manufacturing initiatives, while there appears to be no rebating in the current environment, as the realised price is equating to the gross price.
Additionally, the analyst is now less concerned about rising input costs as the company has demonstrated a willingness to implement out-of-cycle price rises.
Fibre cement upside
A recent survey by Overweight-rated Jarden, not one of the seven brokers updated daily in the FNArena database, shows fibre cement product is gaining market share in
Fibre cement, as a percentage of exterior wall product in north-east
Meanwhile, the broker also points out the company is set to increase its average selling price in
The Outlook
While Morgan Stanley understands the current interest rate caution, James Hardie can mitigate housing weakness with price, mix and growth in market share. Strong backlogs are also expected to ensure that activity is underpinned throughout FY23 at a minimum.
The broker highlights the share price has moved in line with the S&P500 Homebuilder Index in the US, despite the previously mentioned skew to the less impacted R&R segment. The greater portion of the company's North American earnings flow from this segment and the analyst expects the percentage to increase, given initiatives focused on the consumer and the residential market.
On top of this, Morgan Stanley cites the company's demonstrated ability to take market share and grow ahead of the underlying US housing market. The current share of the new housing market is 22%, up from just 9% in 2005.
Finally, in the event of a housing correction, the broker still anticipates price rises of 1-2%, and in such an environment, the company's key cost of goods sold items (pulp, freight, cement, and energy) are also likely to decline.
From among six brokers within the FNArena database there are four Buy or equivalent ratings and two Neutral ratings. The average target price set by those brokers is
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