Australia | Feb 13 2012
– James Hardie wins tax dispute
– Company to receive around $310m in compensation
– Stockbrokers expect additional capital management initiatives
By Chris Shaw
In a case that has dragged on since 1999, James Hardie ((JHX)) has finally won its battle with the Australian Tax Office over a disputed tax assessment. The company will receive more than $310 million in compensation.
Citi points out the High Court ruling makes little difference to James Hardie from an operational sense, but it does offer a boost to the corporate image and removes any discount the market may have been applying to the shares given the magnitude of the dispute.
The balance sheet impact of the favourable High Court ruling will be more significant, BA Merrill Lynch noting the net cash inflow will remove a US$180 million liability from James Hardie's balance sheet.
Around 35% of the amount is expected to be paid into James Hardie's asbestos fund, leaving management with around $202 million in cash. As Citi notes, this has the market thinking capital management initiatives.
Such a view is no surprise, as James Hardie currently has very little net debt on its balance sheet and relatively low capital expenditure requirements. As well, Macquarie notes management last year indicated a more active approach would be taken towards capital management going forward.
Options for management in the view of Citi include a buyback of up to $202 million in capital, which would represent around 4.5% of issued capital, or a combination of debt reduction and capital management. Assuming the latter option either a buyback and/or an increased or special dividend is seen as likely.
James Hardie already has a buyback in place for 5% of issued capital, which was announced in May of last year. To date the company has purchased less than 3.5 million shares of this, which means there is current capacity for around another 19 million shares to be bought back under the existing plan.
As the victory against the ATO offers little valuation impact and given James Hardie has yet to announce how it will allocate the funds, brokers have not adjusted earnings estimates to reflect the High Court decision.
Valuations have been adjusted however, as the full amount of the payment to be received nets off positively against asbestos liabilities. UBS has also adjusted its model to account for a rolling forward of its valuation and some changes to foreign exchange assumptions.
The changes to broker models mean the consensus share price target for James Hardie according to the FNArena database rises to $7.16 from $7.02 previously. Citi, BA-ML and UBS have all raised their respective targets by at least 30c.
Only UBS has adjusted its rating post the ATO win, downgrading James Hardie to Sell from Neutral. The downgrade is a valuation call, as the current share price is above the broker's revised price target. Overall the FNArena database shows James Hardie is rated as Buy twice, Hold three times and Sell three times.
Adjusted for asbestos, UBS estimates James Hardie is trading on a multiple of more than 26 times FY13 earnings, which implies a lack of value in the stock at current levels. Despite this, the Buy argument from the likes of Macquarie is James Hardie's business model has held up well through the US housing downturn and the stock continues to offer strong leverage to any eventual recovery in that market.
Shares in James Hardie today are little changed and as at 11.45am the stock was down 1c at $7.21. This compares to a trading range over the past year of $4.66 to $7.63. The current share price implies downside of around 1% from the consensus price target in the FNArena database.
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