Australia | Nov 19 2012
– James Hardie interim result slightly below forecasts
– US volumes weak during the period
– Earnings expectations trimmed
– Valuation an issue for brokers
By Chris Shaw
Interim net profit for James Hardie ((JHX)) came in at US$83.5 million, a result a little below some expectations in the market given softer volumes in the second quarter. On an underlying basis the result was broadly in line, though the result was accompanied by lower full year guidance from management given a slower than expected recovery in the US market.
As UBS notes, US volumes for James Hardie were weaker than expected despite the company holding prices in check to win margin share. This has put some pressure on margins and partly explains the cut of around 7% in full year guidance from the company.
Outside of the US, Macquarie notes trading conditions for James Hardie remain subdued in Australia, though there are some signs of an improvement emerging in the New Zealand market and the Philippines business continues to perform solidly.
To account for the revision to earnings guidance, brokers across the market have adjusted forecasts for James Hardie. Macquarie has lowered its FY13 earnings per share (EPS) forecast by 3.1%, while BA Merrill Lynch's numbers have been reduced by 4% for the full year. Consensus EPS forecasts for James Hardie according to the FNArena database stand at US35.1c this year and US44.7c in FY14.
The changes to earnings forecasts have not resulted in major adjustments to targets, as the consensus price target in the database is broadly unchanged at $8.41. Targets range from Citi at $7.30 to BA-ML at $9.50, while the stock is rated Buy once, Hold three times and Sell four times.
UBS argues James Hardie is a Sell on valuation grounds, as the stock continues to trade at a solid premium to its $8.00 price target. In the broker's view, even if James Hardie were to achieve its long-term aspirations of 35% market share for US fibre cement and 90% of the total US siding market at 20% margins the current multiple implies the stock is still fully valued.
BA-ML is a little less negative and suggests a Neutral rating is appropriate, as despite ongoing uncertainty with respect to a US housing recovery the current share price implies demand has recovered to mid-cycle multiples.
For BA-ML this implies there is little wriggle room for James Hardie in terms of any disappointment in either the pace of the US macroeconomic recovery or market share growth for the company.
Deutsche Bank is the sole broker in the database to rate James Hardie as a Buy, in part given the flagging of new capital management plans. Deutsche now forecasts a final dividend this year of US35c and expects dividend payout ratios will be lifted from previous guidance of 20-30% to between 30-50% in FY14.
An increase in dividends should support the share price in Deutsche's view, especially as the balance sheet appears strong enough to support such an increase. Add in an expected solid increase in housing starts in the US this year and Deutsche continues to see value.
Shares in James Hardie today are weaker in a slightly lower overall market and as at 11.15am the stock was down 8c at $8.72. This compares to a trading range over the past year of $6.01 to $9.53, the current share price implying downside of around 3% relative to the consensus price target.
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