Chart of the Week: We see opportunity in this beaten down industrial player
The market sees risks and are discounting the shares excessively.
Mentioned: James Hardie Industries PLC (JHX)
The week’s insights come from equity research analyst Esther Holloway’s latest analysis of James Hardie.
Market concerns with latest acquisition
Shares have been cheap since the Azek acquisition was announced. The market thinks Hardie is overpaying for an inferior business it can’t extract value from. While there’s cause for concern, we disagree with the magnitude, and while we’re less optimistic than management, we think Azek’s decking is fit to be sold alongside Hardie’s siding.
Share price weakness is compounded by concerns of cyclical weakness in siding, Hardie’s primary market, and a stretched post-Azek balance sheet, which could exacerbate a hiccup or market weakness. We agree there are risks, but we think the market is discounting the shares excessively, overestimating the risk of a discounted equity raise.
We see positives in a partial refreshment of the board
Investor confidence in James Hardie has suffered a series of blows, starting with the Azek deal in 2025, the coincidental lack of shareholder consultation on the merger, and, more recently, disappointing earnings and sluggish market growth.
Reestablishing trust in corporate governance and capital allocation is critical to a recovery in the shares.
Shareholder dissent resulted in three directors, including the chair, being booted at the annual general meeting in October 2025. We think future corporate governance and capital allocation missteps are much less likely now. Despite the new chair, Nigel Stein, having approved the Azek deal as a director, the ousting of his predecessor is a warning.
We’re encouraged by his outreach to shareholders and his appointment of an Australian independent director with a strong background in building materials for at least one of the two vacant positions on the eight-person board. We expect lower risk tolerance and greater board oversight, particularly during the Azek integration.
Wide moat remains despite capital allocation missteps
The market thinks poorly of the capital allocation in the Azek deal, and Azek’s less-competitive positioning has destroyed the wide moat.
The moat rests on intangible assets and a scale-based cost advantage over competitors. Its fiber-cement siding is a longer-lasting, lower-maintenance product than most competing siding materials.
Its brand presence and reputation provide the business with pricing power and the ability to durably generate returns well above its cost of capital.
We believe customers are prepared to pay more for Hardie siding and will likely remain willing to pay more well into the future as fiber cement remains a proven high-quality siding material, with Hardie the largest distributor in the category and a trusted brand.
We think James Hardie will avoid an equity raise
Hardie’s balance sheet is stretched, with USD 4.4 billion of net debt at the end of 2026 and net debt/adjusted EBITDA of 3.5 at the end of fiscal 2026 per our forecasts, against a covenant of 4.25.
But we expect a recovery thereafter as cyclical weakness unwinds, oil returns to normal sales growth from the packaging of Azek and Hardie sales together, and head office cost savings materialise.
We don’t see a high likelihood of a discounted equity raise. In our view, market share losses given substantial competitor inroads; a loss of pricing power leading to below-inflation price increases and mix shift toward lower-priced product sales; and a failure to extract any additional value from the Azek acquisition would need to happen for an equity raise to be likely. But this is unlikely.
Hardie’s preferred shareholder distributions are via buybacks, and the company has opted to pause these for at least 12 months following the acquisition.
We still see a margin of safety to the downside against a net debt/adjusted EBITDA banking covenant of 4.25 until July 2026, a year after the Azek acquisition, and 4.0 thereafter. The first meaningful debt maturities are about USD 1.2 billion due in fiscal 2028 and 2029, by which point we expect net debt/adjusted EBITDA to be reduced and within the target range by 2029.
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