James Hardie Industries’ share price has risen 64% in FY19 to date, versus the S&P/ASX 200 increase of 18%. Based on our revised estimates, however, we see further potential upside. We came away from James Hardie’s investor trip last month with the impression that the North America fibre cement (NAFC) division would report another strong quarter on 7 November.
Data from the US Census Bureau and our estimates show the exteriors markets index for the NAFC division as being slightly negative (-0.5%) in the September quarter. We estimate exteriors growth of 3.5%, implying primary demand growth of 4%. Meanwhile, pulp and freight combined appear to have been slightly positive for NAFC margins in the quarter, following a slight headwind in 1Q20. This dynamic underpins our estimate of a 26% divisional earnings before interest and tax margin in 2Q20.
Given declining housing approval volumes in Australia, we expect volumes for the Asia Pacific division to fall 9% in the quarter. We also note construction data for Germany was soft in the September quarter. We expect fibre gypsum volumes in Europe to slip 1% on the same period last year, offset by continued strong growth in European fibre cement sales.
At the 1Q20 result, James Hardie set a net profit range of US$325–365m for FY20. Given positive commentary from management and movements in key variables, including US housing activity and inputs, we believe it is possible the bottom end of this range could be lifted (we estimate US$354m).
Our target price has increased to $27.00 from $23.50 due to the above-mentioned changes, as well as our expectation of higher long-term earnings in Europe and our more accurate modelling of capital expenditure requirements. We maintain our Accumulate recommendation.