| Australia and New Zealand Interesting read-through from Fletcher Building with sales picking up over the last 4 weeks, Fletcher home sale price index doing 10% to 15% from peak, a smaller decline that has been reported by REINZ. We see buyers priced out in the market able to enter at current levels, and interest rates peaking creating some support as wages and employment remain elevated. Also heavy falls in select house prices reported over the news have been development sites where developers had overpaid during the peak. Westpac economists however see the RBNZ continuing to hike to 6.00% OCR (another 75 points from current levels 5.25%) due to high migration rate boosting local demand. A very hawkish view and ahead of market expectations of a peak rate of 5.50%. So we are still wary on the full impacts of these rate hikes – it would likely follow once we see unemployment fall. Minutes from RBA meeting also reiterated further interest rates may be required – but conditional on further economic and inflation data. James Hardie shares were one of the best performers on the ASX up +8.3% after reporting a +12% increase in net profit for the year, delivering profit growth by winning market share and improving margins. We remain hold rated as we see the stock priced for further growth which appears unlikely – with mixed housing data across the board. |
| Stock in Focus: Elders (ELD.ASX) |
| Elder’s shares slumped after delivering a weak result for the first half of 2023, the numbers didn’t look so good when compared to a strong half-year result in the previous year. Underlying earnings fell -38% from last year down to $82.8m, which didn’t bode well, forcing the agriculture company to pay out a 23 cents per share interim dividend which is an -18% cut from last year. |
Unfortunately, most business divisions were weaker, with Agency,Wholesale products and real estate services suffering the largest declines in earnings, while overall costs climbed +15% on increased scale of the business after making 6 acquisitions over the last 12-months.
Elders added they expect 2023 full year earnings (EBIT) to be $180m to $200m, at the mid-point down -18% from last year, second half tipped to be better than the first half.
Assuming they deliver we see Elders as a value play at current levels and maintain our BUY rating, trading about 9.5x forward P/E and with a conservative payout ratio to deliver a ~6% dividend yield is attractive buying. With significant upside when their recent acquisitions deliver earnings growth.
US
Home Depot reported weaker earnings – revenue fell 4.25% YoY earnings fell 8.8%. It reflects a weaker building + DIY market in the US, which is what we’re seeing across the board – specialist store Restoration Hardware (RH) reported similarly weak sales. HD fell 2.15% in response, which isn’t enough value for us yet. We initiated coverage of HD back in December where we said that HD is a best in class retailer but too expensive, citing slowdown fears. Those slowdown fears have come to pass yet now we’re anticipating more slowdown versus HD’s 3-5% projected decline in sales for the FY. We think this is too little. Home Depot’s customers tend to be “tradies” and homeowners. Typically having homeowners as a customer base is a good thing – they are cashed up and have equity. Yet we’re in an environment of rising interest rates for mortgages, which will strain that previously strong “homeowner” dollar. We still consider HD to be an exemplary business – even in a recessionary environment they still have net margins of ~20% (vs James Hardie’s 12% and Fletcher’s ~8%) and they maintain an average “ticket” price per sale of ~$92. The headline here is Pandemic spending is over and that goods spend we were seeing previously has shifted to services.
What makes HD a buy?
HD is trading close to normalised lows on a EV/EBITDA basis however we think there is room to move lower, as the projected EV/EBITDA isn’t factoring lower earnings that will likely be sustained later in the year. We’d like to see HD sub-11x EV/EBITDA before we upgrade it to a buy. We expect that earnings to shrink ~5-8% given the macro outlook but note that housing may have hit a “bottom” (see data below) and deceleration of sales will likely be from the discretionary goods/DIY segment of HD rather than wholesale.
Briefly Noted Some last minute bidding action for Manchester United (our highest conviction position in the US model portfolio). Jim Ratcliffe submitted a bid which would value the club close to ~5B GPD but only buy control of ~69% of the club. At the last minute Qatar’s Sheikh Jassim submitted a bid of ~5.5B, which includes ~1B GPD to pay off all debt. Our preference remains for the Qatari’s bid, as it is all cash and factors in an exit price of ~$30 per share.