Company Overview: James Hardie Industries Plc (ASX: JHX) is involved in the research, development, manufacturing, sale, and marketing of high-performance fiber cement and fiber gypsum building solutions. The company has three operating segments namely, North America Fiber Cement, Europe Building Products and Asia Pacific Fiber Cement. The company has 18 operating manufacturing facilities in over 20 countries around the world. The company was listed on ASX in October 2001.

JHX Details

JHX Rides on Transformation Strategies & Partnership Synergies: The company remains on track to make continuous progress on its global strategy, which is reflected via the commercialisation of Hardie ®Textured Panels in North America, Hardie ® VL Plank in Europe, and Hardie™ Fine Texture Cladding in Australia. With this growth momentum, the company is offering high-value products, thus penetrating new and existing markets.

Key Findings from 1HFY22 & 2QFY22 Results:

• Impressive Sales Momentum: In 1HFY22, the company’s net sales from ordinary activities stood at US$1,746.5 million, up 28% year over year, owing to continued momentum in all three regions (North America, Europe, and Australia). 2QFY22 net sales went up by 23% year over year, recording a new high. Notably, global volume witnessed a growth of 14% year over year in 2QFY22.
• Increase in Global Adjusted EBIT: In 2QFY22, adjusted EBIT came in at US$205.7 million, depicting a rise of 26% year over year. Adjusted EBIT margin for the period, stood at 22.8%, an expansion of 70 basis points year over year. The transformational shift to a high-value product mix and continued execution of LEAN has led to exceptional growth for the period.
• Rise in Global Adjusted Net Income: In 2QFY22, the company recorded 29% growth in its global adjusted net income. Whereas in 1HFY22, net profit attributable to shareholders stood at US$271.5 million, depicting a rise of 182% on pcp basis, supported by continued operational improvement across North America, Europe, and the Asia Pacific.
• Geographical Expansion: Net sales from North America Fiber Cement segment increased 23% to US$635.3 million, driven by robust impetus from high-value product mix strategy and strong volume growth. Net sales from the Europe Building Products segment increased 23% to €104.6 million, driven by the growth of high margin fiber cement products, fiber gypsum flooring products, and LEAN manufacturing savings. Lastly, net sales from Asia Pacific Fiber Cement segment increased by 15% to A$196.6 million.
• Enhancing Shareholder’s Value: The company’s robust cash flow has aided JHX to enhance shareholders’ return, with an ordinary dividend of US$ 40 cents per share for 1HFY22.
• Rise in Expenditure: Selling, general, & administrative expenses in 2QFY22, went up by 28% on pcp, driven by strategic investments in growth initiatives, primarily in Australia.
• Liquidity Position: The company generated a robust cash flow of US$357.5 million in 1HFY22, driven by constant progress in its LEAN manufacturing performance, strong, profitable organic sales growth, and supply chain integration with customers. Notably, working capital improved by US$4.9 million during 1HFY22, thus aiding the company to invest higher in organic growth and capacity expansion.

The below picture depicts JHX’s long-term funding to the Asbestos Injuries Compensation Fund ("AICF") for the compensation of proven Australian-related personal injuries.

Funding towards AICF; Analysis by Kalkine Group

Managerial Changes: On 21 January 2022, the company appointed James Johnson as Chief Information Officer (CIO). In another update, the company appointed Ryan Kilcullen as Senior Vice President of Global Operations, and John Arneil as General Manager of Asia Pacific. In addition, the management also appointed Dr. Joe Liu as Chief Technology Officer. These new additions will augment supply chain and quality improvement, which will focus on delivering best practices across all three regions. 

Key Metrics: The company reported a gross margin of 36.4% in 2QFY22, compared to the industry median of 36.1%. The liquidity of the company improved in 2QFY22, with the current ratio at 1.45x compared to 1.42x in 2QFY21. 

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 42.69% of the total shareholding, while the top 4 constitute the maximum holding. AustralianSuper and Bennelong Australian Equity Partners Pty. are holding a maximum stake in the company at 6.97% and 5.62%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: The company is exposed to the threats of the COVID-19 Pandemic, as it could impact the operating environment and the company’s overall results. The company’s business is dependent on the residential and commercial construction markets. Thus, any slowdown in the markets, might impact JHX’s business, sales, results of operations and financial condition. Further, foreign currency fluctuation risks, adverse fluctuations in the supply and cost of raw materials, and changes in government regulations might hinder the company’s business model.

Outlook: JHX anticipates witnessing strong growth in the US residential market and across all three regions in the fiscal year 2022. The company projects that its Europe Building Product segment will achieve net sales and EBIT margin growth year on year. The management now anticipates FY22 adjusted net income to be in the range of US$580 million and US$600 million, up from the previous view of US$550 million and US$590 million. Net sales growth in North America is expected to grow ~20% in FY22 versus FY21. The company is set to report its 3QFY22 results on 7 February 2022.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The company’s stock went down by ~10.3% in the past three months. Currently, the stock is trading slightly below the average of its 52-week high and low levels of $58.07 and $35.63, respectively. The stock has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium as compared to its peers, considering strong growth in the US residential market and across all three regions, decent fundaments, enhancing shareholder’s value, robust cash flow, etc. For the purpose of valuation, peers such as Boral Ltd (ASX: BLD), Adbri Ltd (ASX: ABC), Wagners Holding Company Ltd (ASX: WGN) have been considered. Considering higher revenue base, positive outlook, projects and pipeline development, geographical expansion, indicative upside in valuation, and current trading level, we recommend a ‘Buy’ rating on the stock at the current market price of $46.23, as on 1 February 2022, 1:15 PM (GMT+10), Sydney, Eastern Australia.

JHX Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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