James Hardie Industries plc (ASX: JHX) shares fell to a 22-month low of $37.90 apiece in early trading on Tuesday.
The James Hardie share price is currently $37.98, down 5.05% for the day so far and down 19.3% over the past two days.
The drop follows yesterday's announcement that the building materials giant will make a US$8.75 billion acquisition.
James Hardie announced an agreement to acquire outdoor living products manufacturer The AZEK Company Inc. (NYSE: AZEK).
Management said the purchase would accelerate James Hardie's revenue growth and generate at least $350 million of additional annual adjusted earnings before interest, taxes, depreciation, and amortisation (EBITDA) from synergies once they are fully realised.
The purchase will be funded through a combination of cash and James Hardie shares.
AZEK shareholders will receive $26.45 in cash plus 1.034 NYSE-listed James Hardie shares for each AZEK share they own.
James Hardie CEO Aaron Erter said:
This combination with AZEK is an extraordinary opportunity to accelerate our growth strategy, deliver enhanced and differentiated solutions to our customers and drive shareholder value.
We are uniting two highly complementary companies with large material conversion opportunities and shared cultures centered around providing winning solutions to our customers and contractors.
Together, we will be well positioned to drive sustained above market growth as a leader across attractive categories for the exterior of the home.
Macquarie changes its rating on James Hardie shares
Top broker Macquarie has downgraded its rating on James Hardie stock to neutral following news of the acquisition.
In a note, Macquarie said:
We downgrade to Neutral. This is a disappointing outcome for JHX shareholders, diluting returns. We see it weighing on valuation.
The broker has also substantially reduced its 12-month share price target from $65 per share to $44 per share.
NYSE shares in James Hardie closed at $24.25, down 17.2% overnight.
Macquarie explained:
We have shifted to a SOTP-only valuation, cutting our TP from $65 to $44.
We have materially reduced multiples, to imply 13x FY26E (from 18.9x), as we see the proposed transaction diluting returns materially.
'Attractive asset' but not worth the price paid, says broker
Macquarie acknowledged that AZEK "inherently is an attractive asset" that also resolves a weakness in James Hardie's trim product.
However, the broker said that paying about 6x price/book for a company that has its own substantial intangible asset load (52% of total assets) "will likely materially dilute JHX's formidable return profile".
Last year, James Hardie delivered a return on capital employed (ROCE) of 55%. Macquarie estimates that AZEK returned about 13%.
The broker said it was not factoring in any material change in James Hardie's earnings for the moment.
However, it no longer assumes ongoing future buybacks of James Hardie shares.
