Treasure Chest: A Different Housing Cycle

This story features JAMES HARDIE INDUSTRIES PLC, and other companies. For more info SHARE ANALYSIS: JHX

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Morgan Stanley is looking forward to the next global housing cycle and why this time will be different

Whose Idea Is It?

Morgan Stanley

The subject:

The next cycle in global housing

More info:

Australia ranks as one of the most housing-exposed economies in the world, and so it is no surprise the local equity market also has a large exposure. From Harvey Norman and Nick Scali, through to Carsales, Boral, Beacon Lighting, BlueScope Steel and small caps like Veris; ultimately all roads are connected with the housing cycle locally or abroad.

Just taking direct exposure, Morgan Stanley estimates nearly a quarter of the ASX200's market cap is significantly influenced by housing conditions, and this is obviously larger when adding in the flow-on economic impact to broader domestic cyclicals.

This is evident in the ASX200's price performance, which closely follows house prices. Morgan Stanley’s cautious view on the housing market, as the RBA hikes rates, is therefore a strong influence on the broker’s index target for 2023 of 7200 and on individual stock recommendations.

In terms of portfolio positioning, Morgan Stanley is Underweight domestic cyclicals including Banks, Consumer, and broader Housing-Linked, offset by Overweights in Healthcare, Energy and select defensive growth names.

Overall, the broker holds a negative stance on the major banks, believing earnings have peaked, with the macroeconomic and competitive environment likely to drive slower loan growth, falling margins, growing cost pressures, and rising impairment charges.

As also reported in this week's Rudi's View story ( https://www.fnarena.com/index.php/2023/07/19/rudis-view-low-expectations-not-low-enough/ ), this puts Morgan Stanley in the same cautious camp as the strategy teams at Macquarie and UBS, both preferring defensive sectors that can withstand economic recession.

For UBS, the focus lays on technology, insurance and healthcare, but also on reliable and stable dividend payers, which includes companies in infrastructure, utilities and insurance sectors.

Macquarie's favourites are general insurers, healthcare, infrastructure and utilities, and telcos.

Morgan Stanley continues to see challenging conditions facing the construction market. In a freshly released 112 pages report, the broker builds the case the next cycle will be different; more volume-led while price-constrained.

Naturally, there will be winners and losers along the trajectory.

James Hardie ((JHX)) is considered the highest quality company within the broker’s industrials coverage with a true structural growth story. Exposure to the repair & remodel segment de-risks the company’s portfolio from slower new housing growth. Morgan Stanley is Overweight.

Morgan Stanley is not alone. All five of brokers monitored daily by FNArena who cover James Hardie have Buy or equivalent ratings. Share price-wise, shareholders have had to endure a lot of volatility on the way to a lower share price in recent years as sectorial and operational hurdles had forced management in issuing a number of profit warnings.

Recent market updates are supporting a general sense things might finally be on the straight and arrow again, as also illustrated by a firm looking share price recovery.

Morgan Stanley suggests plumbing products supplier Reece ((REH)) has a good business with a solid management team. However, on a valuation basis, it is the broker’s top Underweight. Management stated the company was “past peak earnings” at the FY22 result last August and further evidence was provided with its first half FY23 result in February.

Again, Morgan Stanley is not alone. Reece attracts three Sell and two Hold or equivalents, albeit there have been no broker updates since the February result.

The reason for the rather lukewarm views on Reece is visible on the price chart in FNArena's Stock Analysis; the shares are trading at a significant premium to the consensus price target, and they have been doing exactly that since the start of the calendar year.

Among property names, the broker’s key Overweight is Mirvac Group ((MGR)), which has a diversified portfolio of office, industrial, and retail assets, a $10bn-plus development pipeline, a funds management business, and a growing BTR (build to rent) platform.

Mirvac attracts three Buy and two Hold ratings among covering brokers.

On current consensus forecasts, Mirvac is projected to pay out 10.3c in dividends in each of FY23 and FY24, effectively leaving nominal payout unchanged for three years in a row, for a yield of circa 4.4% at the current share price.

FY23 is expected to see a big retreat in Mirvac's profits, with no recovery in growth anticipated for FY24. (At least not as far as present consensus projections are concerned).

Among retailers, Morgan Stanley has an Equal-weight on Wesfarmers ((WES)), believing even the mighty Bunnings will not be immune to cyclical weakness in the domestic housing market.

Wesfarmers splits broker views, bearing in mind the group is a very diversified conglomerate of everything from discount general retail to lithium exposure. Two Buys, two Holds, two Sells.

Morgan Stanley is “cautious” on digital classified platforms REA Group ((REA)) and Domain Group ((DHG)).

Seven monitored brokers cover REA, and not one can do better than Hold. Six cover Domain and only one – Citi – has a Buy rating.

In particular REA shares have performed exceptionally well since bottoming out in 2022, recovering more than 50%, though the highs of 2021 remain, at this stage, out of sight.

All in all, it is Morgan Stanley's prediction the next global housing cycle will be dominated by structural shifts in affordability, supply, and mortgages with follow-through consequences for growth, policy makers and markets.

The report has identified twenty companies globally that look well-positioned to benefit. Alongside Wienerberger AG in Germany, Caixabank in Spain, and Lowe's in the US, James Hardie and Mirvac Group have been selected from the ASX.

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