For all client accounts that have selected the “Blend” Australian equity option we have bought James Hardie Industries (JHX), a manufacturer of building products for both the commercial and residential markets. Most of the company’s sales are generated in North America where it is the clear market leader in the fibre cement wood look cladding/siding market with c.90% category share. It also sells trim and interior products and operates in Australia, New Zealand, the Philippines and Europe.

We are positive on the company’s medium-term outlook for the following reasons:

• the macro environment is supportive of ongoing growth in the US housing market
• fibre cement’s superiority in terms of durability and performance versus competitor products in the external cladding market
• cost leadership in the production of fibre cement
• a distribution advantage compared to competitors which will be further enhanced by expansions
• improving plant performance, network flexibility and unit cost trends

The major challenges facing JHX include:

• lingering concerns around capacity issues which resulted in cost and margin pressures
• ensuring brand strength is maintained following the supply issues which compromised its service position
• input cost pressures which offset the benefit of product price increases
• housing construction growth in the US being weaker-than expected

This purchase was funded from the sale of Bluescope Steel (BSL) which despite rebasing earnings higher in recent years, has warned of headwinds going forward from increased input costs (particularly energy costs in Australia), lower domestic steel margins resulting from imported product offerings and softness in premium manufacturing and industrial segments in North America. As such we believe it prudent to switch to James Hardie given the fewer potential headwinds.