Wide-Moat James Hardie’s Fiscal 2022 Largely as Expected; Shares Look Attractive

Business Strategy & Outlook

The supportive of Hardie’s strategy. Hardie’s primary strategic objectives are to expand fibre cement’s share of the U.S. exterior siding market and to shift its sales mix to higher-margin products. The goals are mutually reinforcing and achievable. Hardie has been a key beneficiary of the secular decline of vinyl siding owing to the durability advantages of fibre cement. Hardie estimates vinyl’s share of the U.S. exterior siding market has declined from approximately 40% in 2008 to around 25% in fiscal 2021. This trend to persist with Hardie continuing to be a major beneficiary. The Hardie will be able to leverage its research and development capabilities to penetrate other siding categories such as brick, stone, and stucco. Hardie’s fibre cement product innovations can mimic the appearance of these product categories while being less labor-intensive to install than brick and stone and resolving the performance issues of stucco. Hardie is tailoring its product innovations towards higher margin product categories by focusing on the aesthetic performance of the product, generating an emotional attachment from the consumer, and stimulating less price elastic demand. This strategy is supplemented by Hardie’s marketing campaign which aims to communicate Hardie’s value proposition directly to homeowners. Overall, the Hardie will be successful in continuing to expand fiber cement’s share of the exterior siding market while simultaneously shifting its sales mix towards higher margin products.

The Hardie’s intention to further integrate operations with customers. Customer integration provides the facilitation of knowledge between Hardie and its customers, unlocking working capital benefits and providing opportunities for strategic initiatives. The Hardie’s entrenched customer relationships as a key aspect of the business’ wide economic moat.

Financial Strengths

Hardie declared a final dividend of USD 30 cents per share, taking its fiscal 2022 dividends to USD 70 cents per share. Dividends will be unfranked for Australian taxation purposes. An annual payout ratio of 60% of underlying earnings, the midpoint of Hardie’s 50%-70% targeted payout range.

Hardie runs a conservative balance sheet with leverage— defined as net debt/adjusted EBITDA (excluding the impact of asbestos transactions)—typically within a targeted range of 1-2. Net debt/adjusted EBITDA stood at 0.8 at the end of fiscal 2022. Hardie’s asbestos-related liability—the AICF trust—has a gross carrying value at fiscal 2022 year-end of USD 1.1 billion and remains an overhang. However, payments to fund the liability are capped at 35% of operating cash flow after

adjusting for asbestos liability-related payments. While this reduces cash flows available to shareholders over the medium term, the liability shouldn’t constrain the business’ ability to reinvest within itself. The liability being extinguished within the next decade, likely by fiscal 2027.

Bulls Say

James Hardie is poised to benefit from the secular growth of fibre cement siding at the expense of vinyl, brick, stone, and stucco.

James Hardie’s strategy of shifting its sales mix to higher-margin products will expand its EBIT margins and enhance return on invested capital.

James Hardie’s wide economic moat should protect its ability to earn above its cost of capital over the economic cycle.

Company Description

James Hardie is a producer of fiber cement construction materials. Hardie predominantly serves the residential construction industry with its flagship fiber cement siding product range. The group’s key segment is North America, where it derives around 70% of group earnings from the sale of fiber cement exterior siding and 10% from the sale of fiber cement interior boards. In 2021, the group acquired Fermacell, an exterior and interior products business headquartered in Germany and with operations throughout Europe.

(Source: Morningstar)

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