RISI published its world pulp monthly report for March 2019. Prices of northern bleached softwood kraft (NBSK) in the US – the industry’s benchmark grade of pulp – continue to moderate and RISI has lowered its price forecasts slightly through 2019. For James Hardie’s North America Fibre Cement (NAFC) business, our analysis of the movement in NBSK prices – factoring in a first-quarter lag – shows that the benefit from easing pulp prices should flow through from the second quarter of FY20.
Spot trucking rates have wound back since rising sharply from January 2017 to mid-2018, and March 2019 rates are 13% below the March 2018 levels. We note the majority of James Hardie’s logistics costs in the US relate to the spot trucking rate, with contract trucking and rail being of less significance. The NAFC division should experience relief on trucking costs from the fourth quarter of FY19.
To put pulp and trucking into perspective, we estimate the two costs combined represent a quarter of NAFC’s cost of goods sold. If these variables move 10%, we estimate the benefit to divisional margins at about 1.5 percentage points and the flow-through to EPS at roughly 6%.
We expect James Hardie to see a strong margin performance in FY20. This dynamic, coupled with lower mortgage rates in the US and a refreshed focused on primary demand growth initiatives – such as tweaking the ColourPlus strategy and a sales force restructure – should drive solid growth in FY20.
We have updated our earnings forecasts, with the main change being an adjustment to our volume split between NAFC interiors and exteriors, in line with disclosure from the company at the third-quarter result in February. We have also moderately increased our margin assumption for the Asia Pacific business. Our net changes at the group level are immaterial, with our EPS forecast over FY19–21 rising 0.4%.
We maintain our Accumulate recommendation on James Hardie with a $21.00 target price.