James Hardie Pursues Growth, At What Cost?

This story features JAMES HARDIE INDUSTRIES PLC. For more info SHARE ANALYSIS: JHX

The market has given the Azek acquisition the thumbs down for now, but James Hardie management sees growth opportunities abound.

-James Hardie’s US$8.75bn Azek Acquisition Explained
-New CEO Aaron Erter’s Bold Growth Strategy
-Strategic Fit: Siding and Decking Market Overlap
-What Analysts Say: Mixed Ratings, Lower Targets

By Danielle Ecuyer

James Hardie: “Once combined, we will offer a comprehensive solution of leading exterior brands which positions us to benefit from material conversion opportunities, and pursue a total addressable market more than twice the size of ours today.”

Market reacts quickly to AZEK deal

Shoot now and ask questions later was the go-to response from the Australian market following James Hardie Industries’ ((JHX)) announcement of its takeover of US building materials company Azek for US$8.75bn.

The size of the acquisition dressed up as a “merger” is large at around 50% of Hardie’s market capitalisation, but that is not at first inspection the key issue ruffling analysts’ and investors’ feathers.

At a time when uncertainty over US tariffs looms large and the US housing, repair and remodel (R&R) market is struggling to recover from high interest rates, Mr Market is querying why the new CEO Aaron Erter is so keen to embrace what is in effect a large US takeover at a high cost, which will structurally reshape one of Australia’s darlings inside the building materials sector.

A tale of two companies

Unlike Hardie, which is an Aussie icon and stalwart often characterised as a “quality” company that has successfully diversified overseas, Azek is a relative newcomer.

The US company listed on the NYSE in 2020 at an IPO price of US$23 per share with an initial market capitalisation of around US$3.5bn. So, a takeover at almost three times the original IPO price looks pretty good for some investors, although they will receive a mix of cash and James Hardie shares.

Aaron Erter is also a relatively new CEO for James Hardie, appointed in September 2022. He has faced challenging pandemic and post-covid market issues, as well as a period of high interest rates which have impacted housing markets.

The Hardie CEO is not Australian, having grown up in Ohio and attended prestigious universities and business schools.

A quick scan of his career shows Erter is no slouch, with a blue-blood corporate CV including a three-year stint at Sherwin-Williams (the US equivalent of Dulux) and his early career at Stanley Black & Decker.

Erter’s experience is well established across industrial and consumer-facing businesses.

So will investors and the market give him the benefit of the doubt with this acquisition?

Deal structure and premium

James Hardie is using a combination of US$4.4bn in scrip and US$3.9bn in cash, which will result in Hardie shareholders owning around 74% of the combined business.

Azek shareholders will receive US$26.45 in cash and 1.034 in James Hardie shares at the last close of $46.80.

The deal is pitched at a premium of 26% to Azek’s 30-day volume-weighted average price, or six times price/book, Macquarie explains, with 52% of assets classified as intangibles.

Goldman Sachs notes the proposed transaction, including debt of US$386m as at December 2024, is at 22.4x enterprise value/earnings before interest, tax, and depreciation.

Strategic fit across customer base

There is not much argument across brokers when it comes to the strategic fit of aligning the two businesses, with overlap between siding and decking customers.

RBC Capital highlights 55% of siding contractors also do decking, and around 55% of homeowners do deck and siding projects together. RBC also believes there are strategic benefits of premium product marketing positioning, including “strong aesthetic appeal and durability.“

Azek generates around 74% of its business from composite decking, accessories, and railings, and 26% comes from home exteriors, including decorative mouldings, trim, and columns.

James Hardie has around 66% exposure to repair and remodel (R&R), with 35% from new construction.

With the combined group, all things being equal, final market exposure will be 70% R&R and 30% new construction.

Citi points to comments from Hardie that around 55% of contractors do both siding and decking, which will increase the value proposition to both customers and contractors.

An US$23bn addressable market on offer

At the analyst presentation, James Hardie explained it remains well-positioned to service the sizeable material conversion opportunity in North America, converting wood and vinyl siding to Hardie’s fibre cement board.

The company notes ten million vinyl homes have been constructed over the last thirty years, and over 35m homes are aged between 20 to 40 years; a prime age for replacing or improving exterior sidings.

Azek management argued the residential business has grown by 77% since 2020, with decks, railings, and accessories being a market leader. US-based manufacturing and recycling Azek has sustainability at its core. Wood represents around 35% to 75% of the replacement opportunities for the company’s TimberTech decking product.

Combined outlook for financials

Hardie’s management is aiming for US$125m (EBITDA) cost synergies by 2028 and US$225m (EBITDA) in commercial synergies by FY30. Goldman Sachs proposes that, including cost synergies, the implied takeover multiple is 17x, or 11.8x including both cost and revenue synergies from 22x initially.

RBC views the opportunity for overhead reduction can be more easily facilitated than R&D and manufacturing savings. Macquarie stresses management will likely adopt a cautious approach to sales and R&D, given the potential impacts on the company’s performance.

James Hardie has around 350 salespeople and Azek has circa 250. Morgan Stanley believes there is an opportunity for the James Hardie Contractor Alliance Program to add value to the Azek platform.

Morgans emphasises the acquisition will be dilutive to James Hardie’s earnings in the initial years by around -8% in FY27. The potential upside merits to the takeover lay squarely at the feet of management’s ability to extract the proposed US$350m in total synergies, as well as an improvement in the repair and remodel markets.

The broker also points to increased gearing to an estimated 2.8x net debt/EBITDA, reducing to 2.0x over two fiscal years post-merger, inclusive of share purchases of up to $500m in the 12 months following the closing of the transaction.

Citi sees the takeover as mid-single digit dilutive to consensus earnings forecasts, largely due to the additional interest costs from Azek, some US$192m at around a 5% rate, which is higher than the year-one synergy target of US$139m (US$83m cost and US$56m commercial).

Changing primary listing to the US

Post-merger, James Hardie will have a NYSE listing and a CDI-based listing on the ASX, with possible index inclusion on the NYSE and a valuation re-rating down the track, Macquarie explains.

Erter will remain as CEO, and the Azek CEO, Chairman, and another director will join the board of the merged companies.

Summing up the outlook

Australian analysts and investors have been burned over the years when quality domestic companies have made large overseas acquisitions, which have often resulted in large losses for shareholders and a retreat to core business operations. Boral comes to mind, but there have been numerous other examples.

That point aside, brokers appreciate the strategic rationale for the proposed acquisition, which makes the issue of cost the key point of concern and contention around extracting fiscal synergies at a time when so many question marks overhang the US economy and geo-politics.

Four of the seven FNArena daily monitored brokers have updated their views on the stock, with a consensus target price of $55.587, down -$3.86 from prior to the announcement.

Morgan Stanley believes the sell-down in the shares, over -30% from January, is overdone and has upgraded James Hardie shares to Buy-equivalent from Hold-equivalent.

Macquarie is more circumspect and has downgraded the stock to Hold from Buy-equivalent and cut the target price to $44 from $65 on a lower valuation multiple for FY26 earnings estimates.

Morgans retains a Buy and Citi a Hold. Goldman Sachs does not rate James Hardie, and RBC Capital has a $52 target price and Hold-equivalent rating.

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