Price Movement
James Hardie Industries touched a record high near $7 in December after completing a dramatic company restructuring. The company was trading at $2.80 4 1/2 years ago. As the graph illustrates, there have been some wild swings in price as it has shaken off the mantle of a diversified Australian building products supplier to an American company that is the leader in the fibre cement manufacturing business.
Profile
James Hardie Industries NV (JHINV) was created in December 2001, after shareholders voted to accept a unanimous recommendation by the Australian board of James Hardie Industries Limited (JHIL) to restructure the company
and establish a new parent (JHINV) incorporated in the Netherlands. While it is now ostensibly an American company, the Dutch incorporation minimises its tax.
As an Australian company, James Hardie opened for business in 1888, listing on the ASX in 1951. Its proprietary development of fibre cement in the 1980s saw huge success in the United States. This forced
it to restructure and relocate to the US to avoid the double taxation of shareholder profits
in both Australia and the US.
It is now the world leader in
fibre cement. Overall, 81 per cent of its earnings come from the
US and 19 per cent from the
Asia-Pacific region.
Current details
Fibre cement is made from sand, cellulose fibre, cement and water. It is a multipurpose building material used in siding, and is moisture, weather, fire and pest resistant. The company's 2002 adjusted full-year net profit was $74 million. This is expected to jump to
$146 million for the 2003 full year (placing it on a P/E of
20 times), $178 million for
the financial year 2004, and $200 million for the financial year 2005.
The company is expanding
its fibre cement business into
the Philippines, Asia and South America, and also plans to extend its fibre cement technology into pipes and roofing.
Sector
JHINV has a competitive advantage over its competitors arising from its pioneering development of fibre cement.
Its plant capital costs are half that of its competitors, and it is the largest manufacturer, with costs 20-30 per cent lower than competitors. Since 1994, US James Hardie has moved from 1 to 13 per cent market share in a buoyant US housing market. The company sees the potential to double this market share in the next five years. Even with new construction activity tapering, the renovation market is still set to grow, especially in the northern US.
Worth buying?
Trading near its high, selling on a high P/E of 20 and with heavy American earnings makes JHINV a riskier investment for Australian shareholders. Its upside could be limited in the future, but its market dominance and strong growth makes it an attractive buy whenever the price weakens. Accumulate at between $5 and $5.50.
Geoffrey Hill is presenter of ABC News Radio's daily afternoon finance report and is an independent private client adviser.
