The S&P/ASX 200 Index (ASX: XJO) share James Hardie Industries plc (ASX: JHX) has dropped 33% in the last month. The fund manager L1 Capital thinks that the recent decline has made the business undervalued.
It has been a couple of years since the business last traded at this price, as the chart above shows.
What does this ASX 200 share do? James Hardie describes itself as the world's number one producer and marketer of high-performance cement and fiber gypsum building solutions. It also claims to be a market leader in the European premium timber frame and dry lining business, especially in Germany, Switzerland and Denmark.
Let's have a look at what's going on with James Hardie shares and why L1 believes the business is an opportunity.
Why is the James Hardie share price down so much?
It has been rocked by the global volatility in response to the growing tariff war between the US and various countries.
But, L1 also noted in its monthly commentary that the ASX 200 share fell after announcing the acquisition of Azek, which was described as a leading US decking and exterior building products manufacturer.
The acquisition price implies a 37% premium at an enterprise valuation of US$8.5 billion for Azek, with the deal funded 53% by James Hardie shares and 47% funded by cash.
L1 believes Azek is a high-quality company, with the second-largest market share in the US composite decking market, while having a strong financial track record.
The fund manager said Azek's residential segment, which makes up the majority of the business, has grown revenue at a compound annual growth rate (CAGR) of 15% over the past seven years.
However, in L1's view, the quality of the business was already reflected in Azek's valuation, with the company trading on a forward price/earnings (P/E) ratio of around 28x before the deal was announced. James Hardie offered a premium of 37% to that valuation, while the ASX 200 share was only trading on a forward P/E of 18, and yet a large proportion of the deal is being funded with James Hardie shares.
The fund manager believes the decline of the James Hardie share price suggests the market thinks it has "significantly overpaid" for the acquisition and the transaction is "dilutive to shareholder value".
What is the appeal of the ASX 200 share?
After the large decline, L1 Capital is attracted to the valuation of James Hardie shares, it said:
However, as we look at the shares today, we see valuation support, with the company trading on ~16x forward P/E assuming only cost synergies (and no revenue synergies) are factored in on a run-rate basis. Azek and James Hardie have a track record of delivering double-digit earnings growth over many years and this should continue and potentially accelerate on a merged basis. The current valuation and growth path compares favourably to James Hardie's average forward P/E of ~21x over the past ten years and Azek's average forward P/E of 34x since it listed in 2020.
