Rock-Solid Foundations

James Hardie Industries reported a net profit of US$86.6m for the fourth quarter of FY20 and US$352.8m for the full year, in line with Ord Minnett’s estimate and recent guidance. There was no final dividend.

 

For the North America fibre cement (NAFC) division, FY20 earnings before interest and tax (EBIT) came in a touch below our forecast. NAFC volumes grew 8%, versus our 7.9% estimate, with 9% in exteriors and 1% in interiors.

 

Volumes for the Asia Pacific fibre cement (APFC) business declined only 4% in 4Q20 despite weaker market conditions in Australia, and lockdowns in the Philippines and New Zealand. EBIT in AUD actually rose in 4Q and FY20, helped by lean savings and lower pulp costs.

 

Europe EBIT of US$0.6m for 4Q20 was well short of our US$3.7m estimate due to higher costs. Management noted the business was affected by both execution issues and COVID-19-related operational disruptions – in the UK and France in particular – in the second half of the year. It was encouraging, however, to see a strong volume performance in 4Q20 from fibre cement and an improvement from fibre gypsum.

 

James Hardie has delivered on its plan to accelerate market share gains and to roll out a lean manufacturing system, announcing strong results for FY20 and promising trends for the first quarter of FY21 to date. We believe the latter, combined with new cost-savings initiatives this year, helped drive the positive share price reaction.

 

We expect James Hardie to deliver market share gains in all regions, while retaining strong margins even in the current weak environment. We have increased our primary demand growth assumptions and now expect less margin pressure in FY21. We also believe the company’s balance sheet is in a solid position with ample credit liquidity to manage through the current uncertain demand environment.

 

We retain our Buy recommendation and have raised our target price to $28.00 from $25.00.

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