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Speaker 1: Welcome to Fear and Greed, summer investing series brought to

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Speaker 1: you by vanta specialist in compliance lead growth. I'm Sean Aylmer.

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Speaker 1: James Hardy is a global building materials manufacturer. Although in

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Speaker 1: Australia many people still associated with the supply of asbestos

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Speaker 1: products decades ago and the legal battles and compensation that followed.

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Speaker 1: I wanted to find out more about this company though,

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Speaker 1: including how investors should think about it in twenty twenty five.

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Speaker 1: As always, this is general information only and you should

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Speaker 1: seek independent advice before making investment decisions. Gorav Sodi is

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Speaker 1: the deputy head of research at Intelligent Investor Grave. Welcome

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Speaker 1: back to Fear and Greed.

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Speaker 2: Hi, Sean, thanks for having me on again.

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Speaker 1: James Hardy is an iconic company in Australia, but it's

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Speaker 1: past in some ways, Lingers.

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Speaker 2: Would you agree absolutely? There are probably two stigmas attached

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Speaker 2: to James Hardy. One is the historical stigma attached to

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Speaker 2: their production of this beestos and they have been paying

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Speaker 2: money from their profits to asbestos victims for many many

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Speaker 2: years and they will continue doing that for many many years.

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Speaker 2: So when you're looking through the accounts, that's something to

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Speaker 2: keep in mind. I think the company does a very

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Speaker 2: good job of adjusting for those and it's quite easy

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Speaker 2: to look through those payments and see what the underlying

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Speaker 2: business is doing. But there's a second stigma that I

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Speaker 2: think investors have about this business as well, and that

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Speaker 2: is that it's a cyclical pig because it's a building

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Speaker 2: materials business. Building materials businesses are typically capital intensive, they're cyclical,

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Speaker 2: and they're competitive, so they're not ideal hunting ground for

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Speaker 2: great investing ideas. But I think the reason we're talking

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Speaker 2: about Hardy today is because Hardy's different. Tell us why, Well,

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Speaker 2: the way to think about James Hardy is not so

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Speaker 2: much as a traditional buildings material business, but as a disruptor.

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Speaker 2: What really distinguishes this business from other of its peers

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Speaker 2: is that it doesn't really screw amble for margin, or

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Speaker 2: face competition or fight the cycle. This is a business

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Speaker 2: that's come up with a new cladding that is absolutely

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Speaker 2: tearing away in the US. Now, in the US, cladding

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Speaker 2: is just the exterior composition of houses, what they put

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Speaker 2: on the outside of houses. In Australia, we're used to

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Speaker 2: having high quality materials like brick or jip rock on

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Speaker 2: the outside of houses. In the US, they've sometimes had leather,

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Speaker 2: a cardboard material really low quarterly quality, rather cladding materials,

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Speaker 2: and James Hardy has introduced fiber cement, which is a

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Speaker 2: relatively cheap alternative, but an infinitely better quality alternative. Now

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Speaker 2: that clouding material is rapidly gaining market share. It's a

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Speaker 2: disruptor in the US, and James Hardy controls ninety percent

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Speaker 2: of the supply of fiber cement into the North American market.

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Speaker 2: So I view this as not so much as a

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Speaker 2: cyclical competitive business, but as a disruptive business, and the

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Speaker 2: returns are commensurate with a disruptive business. Hardies typically generates

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Speaker 2: returns on capital around twenty percent, unheard of in this industry,

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Speaker 2: and cash flows have sort of tripled over the last

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Speaker 2: ten years. Margins have expanded, revenues have grown. This looks

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Speaker 2: like nothing like a traditional buildings materials company. When you

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Speaker 2: tear it down, it actually looks like a high growth,

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Speaker 2: high quality business, and we treated as such.

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Speaker 1: Management of Hardies.

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Speaker 2: Again, this is a hard business to manage. You have

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Speaker 2: to manage a really large distribution network in order to

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Speaker 2: get your product through to individual builders. Requires thousands of

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Speaker 2: points of distribution, difficult to manage. On top of that,

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Speaker 2: this is a traditional manufacturing business, so you have to

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Speaker 2: have big, heavy industry plants source raw materials. So it

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Speaker 2: does require very good management. And over the years, Hardy's

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Speaker 2: has built up a reputation as being a superbly managed business.

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Speaker 2: So I'm really happy with the management. And it's not

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Speaker 2: just a superstar. See we've seen successive waves of CEOs

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Speaker 2: come and go at Hardy's and they've all been good quality.

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Speaker 2: What we're always looking for is good capital allocation. How

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Speaker 2: do they retain profits, how do they reinvest profits? Do

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Speaker 2: they return them back to the shareholder? And you don't

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Speaker 2: expect a lot of dividends here because there is a

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Speaker 2: lot of maintenance of equipment. There's lots of new investment

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Speaker 2: in new supply, but the returns they get from that

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Speaker 2: investment is fantastic. So management quality gets a big tick

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Speaker 2: from me.

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Speaker 1: There's always a risk to investing in any company. What's

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Speaker 1: the risk with James Hardy.

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Speaker 2: Too big, Ris Shawan. The first is that this remains

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Speaker 2: a cyclical business. Now, this is not a boom and

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Speaker 2: bus stock the way other building materials businesses are, but

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Speaker 2: We certainly see that margins and revenues expand in the

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Speaker 2: boom and they contract in the bust, and so there's

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Speaker 2: an opportunity typically to buy this at very attractive prices,

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Speaker 2: but it does look beaten down and knocked up when

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Speaker 2: that happens. The other thing is that the investment community

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Speaker 2: is now starting to realize that Hardias is a great

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Speaker 2: business and the pe has been creeping higher over the years.

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Speaker 2: We used to be able to buy this, and we

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Speaker 2: have bought this many times at twenty times earnings all less,

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Speaker 2: you're now being asked to pay about thirty times earnings.

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Speaker 2: So right valuation matters, so make sure you get this

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Speaker 2: at the right price.

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Speaker 1: Gorav, thanks for your time, pleasure.

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Speaker 2: Sean, thank you.

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Speaker 1: That was Goreav Sody, Deputy head of research at Intelligent Investor.

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Speaker 1: Remember to get your own independent advice before making investment decisions.

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Speaker 1: This is Fair and Greed Summer Investing series brought to

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Speaker 1: at vanta dot com. Slash fear and greed. I'm Sean Elmer.

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Speaker 1: Enjoy your day,