Reporting Wrap: BHP & James Hardie

August was a busy month for Australian investors with the majority of ASX-listed companies reporting FY23 results. Here we review the results and key investor takeaways of current portfolio holdings BHP and James Hardie.   

BHP Limited (ASX: BHP)

Earnings at Australia’s largest public company fell to US$13.4 billion in FY23 as weaker commodity prices and cost pressures squashed the bottom line. Across its three main commodities (copper, iron ore and coking coal) realised prices fell 12%, 18% and 22% respectively. BHP faced several fronts of cost inflation, most notably higher wages for its workforce, diesel, consumables, ammonia and explosives.

Key Points:

• Cycling elevated prior-year commodity prices

• Underlying earnings per share of US$2.65

• Final dividend of US$0.80, FY23 dividend of US$1.70

The headline numbers indicate that BHP had a poor year. However, it should be noted that the business is cycling abnormally high commodity prices, particularly for coal, that spiked when Russia invaded Ukraine in early 2022. Notwithstanding the 37% drop in earnings, BHP still achieved a return on capital of nearly 29% this year. Moreover, operating margins remain above 50% and the business recorded its seventh straight year of at least US$15 billion in operating cash flow. This demonstrates the strength of the miner, and that despite still being leveraged to economic and market cycles, it can earn a robust return and profits on its asset base.

ESG and Mining

Environmental, social and governance (ESG) is an increasingly important consideration for our clients and investors. While it can be difficult to reconcile investing in mining companies given the sector is inherently carbon and land-intensive, BHP has made tangible changes in its operations to positively impact both people and planet.

Source: BHP

Historically, BHP owned and operated extensive petroleum and thermal (energy) coal assets. In recent years the business has divested most of these assets and recycled the capital into future-facing commodities with better growth prospects. Should the world limit global warming to 1.5 degrees above pre-industrial levels, we will need to double the amount of copper and potash, in addition to a four-fold increase in nickel.

From an operational perspective, greenhouse gas (GHG) emissions have fallen 11% in FY23 and 30% since FY20 largely due to purchasing power agreements for renewable energy. The business will spend a cumulative US$4 billion on reducing carbon emissions out to 2030. BHP maintains it is on track to reach net zero emissions by 2050. The key will be finding alternatives for diesel, which currently accounts for 52% of BHP’s emissions.

In terms of diversity, BHP has made a concerted effort to recruit females. BHP’s workforce comprises 35% of women, up from 17% in 2016. It’s also supporting indigenous communities, with indigenous procurement spend more than doubling to US$333 million. Indigenous employees represent at least 7% of employees in Australia, Chile and Canada.

James Hardie Industries (ASX: JHX)

James Hardie is a global building materials company best known for its range of fibre cement products used for siding. Homebuilders are increasingly adopting fibre cement due to its better durability, colour consistency and resistance to fire compared to alternatives such as wood, brick or vinyl. As a result, fibre cement’s market share in the United States, of which James Hardie commands 90%, has increased from 16% to 23% since 2012.

Key Points:

• Housing demand moderating

• Resilient margins

• Profit of US$157.8 million, down 3%

Admittedly, building material companies usually earn poor returns owing to a lack of pricing power given the commoditised nature of products (think bricks, concrete, asphalt). However James Hardie’s dominant market position and differentiated offering enable it to charge premium prices and subsequently earn a 40% return on capital employed. This has translated into healthy shareholder returns, with volumes and earnings increasing 9% and 16% per year respectively over the past decade.

During the month, James Hardie provided a first-quarter update. Management noted continued softness in building construction as housing markets recalibrate to higher interest rates. While new housing starts and completions have fallen materially from the highs of 2022, the trend has begun to stabilise and show signs of recovery. This is reflected in management’s guidance that volumes in the United States, where James Hardie derives 93% of profits, would fall 5-18% this year, an improvement from a 14-19% fall expected just three months ago.

Source: JP Morgan

Despite recent economic headwinds, James Hardie has been able to not just maintain but improve margins via price increases and diligent cost control. In the Asia Pacific, a sales volume decline of 8% was more than offset by a 12% increase in prices. The same trend, to a lesser extent, was evident in both North America and Europe. Lower freight costs meant more revenue dropped straight to the bottom line, where James Hardie achieved a record 31.3% operating profit margin.   

Our longer-term investment thesis for James Hardie remains intact. We expect the business to continue taking market share in its two main target markets: repair and remodel and new single/multi-family construction.  Over 50% of homes in the US are older than 40 years old and therefore prime for renovation, with this percentage only expected to increase in future years. Higher interest rates also discourage housing sales and instead incentivise the improvement of existing dwellings. New home projects are supported by partnerships with homebuilders. This quarter James Hardie became the exclusive hard-siding provider of the largest home builder in the United States, D.R. Horton.

Disclaimer: BHP and James Hardie are held in LPW Portfolios.