Company Overview: James Hardie Industries Plc is a manufacturer of fiber cement products and systems for internal and external building construction applications in the United States, Australia, New Zealand, and the Philippines. The Company's operating segments are North America and Europe Fiber Cement, and Asia Pacific Fiber Cement. The North America and Europe Fiber Cement manufactures fiber cement interior linings, exterior siding products and related accessories in the United States. The Asia Pacific Fiber Cement includes fiber cement manufactured in Australia, New Zealand and the Philippines, and sold in Australia, New Zealand, Asia, the Middle East (Israel, Saudi Arabia, Lebanon and the United Arab Emirates) and various Pacific Islands. The Company offers a range of fiber-cement building materials for both internal and external use across a range of applications, including external siding, internal walls, floors, ceilings, trim, fencing and facades.
 

JHX Details

James Hardie Industries PLC (ASX: JHX) is a well-known name in manufacturing, development, sale etc., of fiber cement building materials such as siding products. While housing data has been on a downtrend, there is a gradual improvement in mortgage scenario and a better price and volume scenario for building material etc. The upcoming fourth quarter update is expected to benefit from the overall scenario, which looks to be on a stable side with few short-term challenges at hand. JHX expects to benefit from sales in North America and international businesses will also add value. Catalysts that include penetrating the US market, bolt-on acquisitions like that of Fermacell, and better fiber cement sales in Europe are expected to drive medium-to-long term investment thesis. We expect an improvement in Earnings per share ratio over the next 12-24 months and this brings a case for a decent upside in the stock performance. The group earlier narrowed its FY19 net operating profit guidance ($295 m - $ 315m) and with broader-level margins settling within the range, the guidance is expected to be met.
 
Strong Momentum in Net Sales: James Hardie Industries PLC (ASX: JHX) released its earnings report for the Q3 FY 2019 and for the period ending nine months to December 31, 2018; and its net sales for Q3 FY 2019 and nine months witnessed a rise of 18% and 23%, respectively, from the prior corresponding periods and stood at US$586.2 million and US$1,881.8 million, respectively. In both the periods, net sales got supported by acquisition of Fermacell in Europe and higher net sales in North America Fiber Cement and Asia Pacific Fiber Cement segments. The company’s gross profit stood at US$192.2 million for Q3 FY 2019 and US$620.4 million for nine months to December 2018, witnessing a rise of 5% and 15%, respectively, as compared to the prior corresponding periods. However, the gross profit margin was 32.8% for the quarter and 33.0% for nine months, thus, a fall of 4.1 percentage points and 2.3 percentage points, respectively, was witnessed as compared to prior corresponding periods.


Key Metrics (Source: Company Reports)

The company’s management had stated that North America Fiber Cement segment witnessed a modest growth in the top line of 2% for Q3 FY 2019 and 7% for nine months ended December 2018. They added that the North America housing market demand was soft throughout most of the geographies as well as customer segments. However, there was improvement in the company’s exteriors business, and it grew slightly above the addressable market, but below the expectations. The company’s management team is transforming the commercial strategy as well as implementing Lean manufacturing as the operating approach with respect to North America plants. There are expectations that the transformations would lead to an improvement in the execution and results.

Moving forward, the company is expected to be supported by decent liquidity standing, deployment towards R&D and capacity expansion and by maintaining the flexibility for the accretive and strategic inorganic growth and/or flexibility to manage through the market cycles. The company plans to shell out ordinary dividend payments within payout ratio of 50-70% of the net operating profit, excluding asbestos.

Top 10 Shareholders: The following table provides a broad overview of the shareholding pattern of James Hardie Industries:

Top 10 Shareholders (Source: Thomson Reuters)

Decent Standing in Key Margins Further Strengthens Confidence: James Hardie Industries is having a decent position in terms of its key margins as its net margin stood at 11.6% in Q3 FY 2019 which is higher than the industry median of 4.6% reflecting the company’s capability to convert its top line into bottom line. During the same period, the company’s operating margin stood at 16.5% which is higher than the industry median of 8.5%.


Key Metrics (Source: Thomson Reuters)

Also, the company’s RoE stood at 7.1% which is comfortably higher than the industry median of 1.8% reflecting that the company has been efficient in delivering returns to the shareholders, which could attract the attention of market players. The current ratio of JHX stood at 1.35x which can be considered at respectable levels and it reflects that the company is having a decent liquidity standing which might help it in achieving the long-term growth prospects.

Increased sales volumes, higher average net sales price supported North America Fiber Cement Segment: The Fiber cement net sales amounted to US$385.5 million in Q3 FY 2019 which implies a marginal rise of 2% while, in nine months to December 2018, the Fiber cement net sales stood at 1,254.9 million as compared to 1,168.0 million in the same period of last year. The release issued by the company stated that the net sales for Q3 FY 2019 and nine months to December 2018 got supported by the increased sales volumes as well as increased average net sales price as compared to the prior corresponding periods.


Q3 FY 2019 North America Summary (Source: Company Reports)

A Look at Asia Pacific Fiber Cement Segment: James Hardie Industries stated that the Asia Pacific Fiber Cement segment results (in the US dollars) got unfavorably impacted for Q3 FY 2019 and nine months by 7% and 5% change in the average AUD/USD foreign exchange rate, respectively, as compared to prior corresponding periods. In Q3 FY19, the average net sales price per unit (per msf) stood at US$713 which implies a fall of 6% on the YoY basis; while, in nine months to December 2018, it stood at US$731 which reflects a fall of 4% as compared to same period of previous year. 


Asia Pacific Fiber Cement Segment (Source: Company Reports)

However, the volume for Q3 FY 2019 and nine months to December 2018 rose by 11% and 12%, respectively, as compared to prior corresponding periods, mainly because Australian and Philippines businesses achieved volume growth above their underlying market growth. In Australia, the growth in the volume got supported by the market penetration as well as category share gains. In Philippines, volume growth was witnessed because of implementation of strategic distributor programs in the region.

Fermacell acquisition Supported Europe Building Products Segment: The net sales for Q3 FY 2019 and nine months to December 2018 witnessed a rise as compared to the prior corresponding period, because of the rise in volume due to Fermacell acquisition on April 3, 2018. The average net sales price in the US dollars for quarter and nine months witnessed a fall as compared to prior corresponding periods mainly because of product mix.


Europe Building Products Segment (Source: Company Reports)

Rise in Cash Provided by Operating Activities: James Hardie Industries stated that the cash provided by operating activities witnessed a rise of US$31.2 million and stood at US$302.8 million. A rise in cash provided by the operating activities was mainly because of US$50.0 million rise in the net income adjusted for the non-cash items as well as a favorable change with respect to working capital of US$49.7 million, partially offset by the unfavorable changes witnessed in other operating assets and liabilities amounting to US$68.5 million.

A View on JHX’s Liquidity and Capital Allocation: The cash position of James Hardie Industries witnessed a fall from US$281.6 million as at 31 March 2018 to US$118.5 million as at December 31, 2018. The company stated that, on April 3, 2018, they drew €400.0 million (or US$492.4 million considering the exchange rate at April 3, 2018) from 364-day term loan facility, and they utilised the funds to wrap up the acquisition of Fermacell.


Debt Profile (Source: Company Reports)

Considering the existing cash balances, along with the anticipated operating cash flows arising during the year as well as unutilized committed credit facilities, there are anticipations that JHX would be having sufficient funds in order to meet the planned working capital and other expected cash requirements for the span of next twelve months. Historically, the company has met the working capital needs as well as capital expenditure requirements with the help of cash flows from operations and credit facilities.

What to Expect from JHX Moving Forward: James Hardie Industries had stated that there are expectations that the modest growth in the US housing market might continue through remainder of fiscal year 2019. The single family new construction market and repair and remodel market growth rates in fiscal year 2019 might witness a rise, though involving a growth rate lower than in fiscal year 2018. JHX anticipates new construction starts to be between 1.2 million and 1.3 million.

There are expectations that EBIT margin of North America Fiber Cement segment would be in middle of the stated target range which is 20%-25% for fiscal year 2019. The expectation is based upon the company continuing to improve operating performance with respect to its plants, continuing to experience inflationary trends for the input costs, as well as a strong US dollar. The company’s management had noted a range of analysts’ forecasts for net operating profit excluding asbestos for the year ending March 31, 2019 which is in the range of US$297 million and US$311 million.

The management had cautioned that although the US housing activity has been witnessing improvements, the market conditions are uncertain as well as some input costs remain volatile.


Key Valuation Metrics (Source: Thomson Reuters)

Stock Recommendation: With respect to capacity expansion, in North America, the company continued the start-up of Tacoma greenfield expansion project, which is anticipated to be wrapped up in Q1 of fiscal year 2020, and continued construction of greenfield expansion project in Prattville, Alabama. There are anticipations that this greenfield expansion project might be commissioned in 2H of fiscal year 2020 which involves an estimated total cost amounting to US$240.0 million. It also continued the expansion project within ColorPlus product line which includes equipment, land, and building involving an estimated cost amounting to US$20.6 million.

The stock of James Hardie Industries has delivered the return of 9.39% in the span of previous 3 months while, in the time frame of past six months, the stock’s return stood at 9.78%. Also, the company’s decent position with respect to its key margins is a noteworthy aspect for market players.

With respect to North America, the company’s strategic priorities revolve around accelerating exteriors growth, drive Lean transformation and re-establish interiors as growth drivers. However, with respect to Europe, its strategic priorities are to achieve consistent growth in top line of Fermacell and Aestuver brand products, identify market opportunities for JH Global portfolio FC products as well as commence sales execution, identify opportunities for the new FC applications, execute product development and prepare for market launch and unlock the existing manufacturing capacity. Looking at the consensus Earnings per Share for forward 24 months close to $1 and price to earnings ratio of low double digit, a target price upside of about high single digit can be expected going forward.

On the backdrop of above-mentioned factors, we give a “Buy” recommendation on the stock at the current market price of A$18.300 per share.

 
JHX Daily Chart (Source: Thomson Reuters)

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