EUR 850.00 For Business Accounts Only

Morningstar | James Hardie FVE Intact Despite Tempered U.S. Residential Construction Outlook

We remain optimistic about U.S. housing construction and still expect strong growth in coming years, but we’ve tempered our forecasts for the next several years. We now expect that lower immigration and ownership affordability issues will prove more inhibitive to housing construction in this cycle than previously anticipated, and we expect a cumulative 15 million starts over 2018-27, down 10% from our prior forecast of 16.8 million. Despite this moderated outlook, our fair value estimate for narrow-moat James Hardie is intact at AUD 21.20 per share. At current share price levels, Hardie still screens as fairly valued.

We believe our revised forecast is still bullish relative to the consensus view. Indeed, we still see several more years of solid residential construction ahead, driven by the large and aging millennial population, continued job and wage growth, and an increased supply of entry-level homes. Our revised forecast calls for total starts--single-family and multi-unit--to improve from 1.28 million in 2018 to 1.61 million in 2022 before moderating to 1.47 million by 2027. We previously projected total starts to grow from 1.30 million in 2018 to 1.93 million in 2021 and then moderate to 1.52 million by 2027.

While our near-term earnings outlook is lower under our revised outlook, two factors reduce the valuation impact on Hardie. First, our midcycle construction activity expectations are unchanged. Although we now expect single-family home construction to peak at 1.2 million starts in 2022, 17% below our prior peak forecast, we still expect 1.1 million single-family homes to be constructed in 2027. The impact of this long-term midcycle forecast is more meaningful to our Hardie valuation than movements through the cycle. Second, Hardie derives approximately 60% of its North American sales from the less volatile repair and remodelling market, where we still expect 4% annual growth through the forecast period.

Near-term earnings will be affected by a somewhat softer top line, however. We now expect revenue to grow at a five-year CAGR of 11.9%, down from a prior 13.1%. Operating leverage will marginally reduce EBIT margins, now expected to average 19.4% over the coming five years versus our prior forecasts of roughly 20%. Altogether, we expect operating income to grow at a five-year CAGR of 13.5% to AUD 727 million in fiscal 2023, down from a prior five-year CAGR of 15.5%. Nonetheless, we still forecast a midcycle EBIT margin of 23.2% for Hardie, corresponding with our unchanged midcycle construction activity expectations.