James Hardie updated guidance for the first quarter of FY21. A key highlight was management’s comment that primary demand growth for fibre cement in the US is tracking “well ahead of 7%”. The carry-through of strong housing starts in January and February has also helped volumes.
The main drivers of the upgrade in earnings before interest and tax margin guidance were: 1) strength in volumes; 2) execution of lean manufacturing; and 3) cost-saving initiatives. Management noted it was gaining momentum with its customers and remains focused on taking market share.
Despite the disruptions from COVID-19, the underlying North American housing market was characterised as “very strong”, with a shortage of houses in the US. The shift in demand seen during COVID-19, with people moving from large cities to single-family houses in the suburbs, was also acknowledged as a favourable dynamic for James Hardie and the industry more broadly.
The growth in recent weeks has been driven by new construction, while remodel and repair (R&R) activity remains below levels expected before COVID-19. Key factors weighing on growth include high unemployment levels in the US (management noted a third of the 42m unemployed would be part of its target market) and homeowners’ reluctance to have contractors working on their houses. The company is beginning to see an improvement in the R&R market, however, as more states ease restrictions and the weather picks up into the northern summer.
A risk we need to acknowledge is further impact from the pandemic in the US as infection rates have picked up noticeably in the south. In the medium to longer term, however, we believe James Hardie has a long runway of market share opportunities ahead in all regions.
We have increased our EPS estimates by an average of 6% over the FY21–23 period, due largely to stronger margins in North America. We maintain our Buy recommendation and have raised our target price to $30.00 from $28.20.