PMI Down 6% M-o-M; Two Material Sector Players - JHX, CSR

  • Feb 13, 2020 AEDT
  • Team Kalkine
PMI Down 6% M-o-M; Two Material Sector Players - JHX, CSR

Among the main industries of Australia are service, tourism, healthcare, media & entertainment, finance, mining, manufacturing and agriculture.

The Australian Performance of Manufacturing Index, referred to as Australian PMI, of the Australian Industry Group, declined to 45.4 in January 2020 from 48.3 in the previous month. This reflects the decline in the factory activity from past three months. Moreover, the index stood at the lowest in January 2020 since June 2015.

Six of the seven activity indices registered a decline in the first month of the year (2020) with exports being the only index showing resilience. Production, new orders and deliveries all have fallen significantly in January 2020. The decline in local production could be attributed to factors including bushfire, residential construction downturn, global trade disruptions and slow local consumption.

Let us discuss two stocks from the materials sector, namely James Hardie Industries and CSR Limited.

James Hardie Industries plc (ASX: JHX)

James Hardie Industries plc (ASX: JHX), based in Ireland and listed in ASX, is a global company that caters to interior and exterior premium building (fibre cement) products segment. The company operates in regions including North America and Europe in addition to countries like Australia, New Zealand and the Philippines.

Group Adjusted NOPAT Up 17 Per Cent

The company, on 11 February 2020, released results for the third quarter and nine months of FY2020 ended 31 December 2019, reporting a 17 per cent year-on-year increase in group adjusted net operating profit (NOPAT) to US$77.4 million for the quarter and US$266.2 million for the nine months. There has been an 18 per cent increase in group adjusted EBIT to US$107.2 million and 5 per cent rise in group net sales to US$616.7 million during the third quarter.

Net sales were favourably impacted by higher sales volumes and a higher average net sales price compared to the prior corresponding periods. Growth in exteriors of 13 per cent and 8 per cent for the quarter and nine months, highlighting strong primary demand growth as the company’s commercial transformation gains traction. Interiors volume increased 3 per cent for the quarter and was flat for the nine months, highlighting continuous improvement and traction of its interior’s strategy.

Additionally, an 11 per cent rise was reported in the volume of fibre cement segment in North America, which posted an EBIT margin of 26.1 per cent. The company’s fibre cement segment in the Asia-Pacific region registered an EBIT margin of 22.9 per cent, while the building products segment in the European region posted an EBIT margin of 7.9 per cent for the third quarter of FY2020.

Outlook 2020

While announcing the third consecutive quarter of strong financial results, the company also updated the market with its expectations and outlook for FY2020.

  • For fiscal 2020, based on strong performance in the exteriors business, the company has raised the target of Primary Demand Growth (PDG) from 4-6 per cent to more than 6 per cent;
  • Reaffirmed the fiscal year 2020 EBIT Margin for fibre cement segment in North America in the range of 25-27 per cent;
  • Anticipates new construction starts to be about 1.3 million in fiscal year 2020;
  • For Australia, the company projects its addressable underlying market to experience high single-digit percent contraction in fiscal year 2020 versus fiscal year 2019, and volume from the Australian business is anticipated to keep on growing above the market;
  • For Europe Building Products segment, the company intends to achieve year-on-year growth in net sales and flat EBIT margin when compared to the fiscal year 2019;
  • In Europe, the company projects addressable underlying market to slightly fall versus fiscal year 2019;
  • Net operating profit excluding asbestos is expected to be in the range of US$356 million to US$380 million;
  • Full year adjusted net operating profit is anticipated to be in the range of US$350 million to US$370 million, compared to adjusted net operating profit of US$300.5 million in fiscal year 2019.

On 13 February 2020 (AEDT 01:47 PM), the JHX stock was trading at $ 30.480, down 3.391 per cent from its previous close. The company has a market cap of $14.06 billion, while its stock has delivered a return of 42.37 per cent in the last six months.

CSR Limited (ASX: CSR)

CSR Limited (ASX: CSR), is a materials sector player, manufactures renowned building products meant for home builders, renovations and commercial construction, with operations in Australia, New Zealand, Asia, and the United States.

In the first half of FY2020 ended 30 September 2019, CSR reported

  • Statutory net profit after tax of $68.8 million, compared with $26.8 million registered in the year-ago period;
  • Net profit after tax (before significant items) was down from $89.6 million to $71.6 million in the six months to September 2019;
  • EBIT from continuing operations was noted at $113.1 million (before significant items), which was 16 per cent lower than the prior comparable period.

Outlook FY2020 ending 31 March 2020

For fiscal 2020, CSR anticipates to register net profit after tax (NPAT) (before significant items) in the range of the low end of $107 million and median of $133 million. This expectation excludes any significant earnings from property,

For building products segment, the second half results are projected to be lower than the first half of 2020, on the back of the seasonality in volumes. In property segment, there will not be significant earnings in the second half of FY 20. Further, for the second half of 2020, the company has already hedged the aluminium price at an average price of $2,763 per tonne (excluding ingot premiums).

The stock of CSR was trading at $4.935 on 13 February 2020 (AEDT 02:57 PM), up 0.101 per cent from its previous close, with a market cap of $2.42 billion and annual dividend yield of 4.67 per cent. The stock has delivered a return of 25.24 per cent in the last six months.

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