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Speaker 1: Welcome to the Fear and Greed summer series. I'm Suan Alma.

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Speaker 1: Today I'm talking to Gorerav Sodi, Deputy head of Research,

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Speaker 1: had intelligent investor about James Hardy, a company, well, an

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Speaker 1: iconic company, I would say, in many ways, had a very,

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Speaker 1: very tough twenty twenty five. Though, remember this is general

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Speaker 1: information only, and you should always seek professional advice before

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Speaker 1: making investment decisions. Gore, welcome back to Fear and Greed.

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Speaker 2: Thanks Sean. Great to be with you.

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Speaker 1: What do you make of James Hardy? An incredibly controversial takeover,

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Speaker 1: change of listing unhappy shareholders, one of the worst performers

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Speaker 1: of the ASX two hundred and twenty twenty five. How

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Speaker 1: do you wrap all that up?

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Speaker 2: We were actually shareholders in James Hardy, Sean. I went

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Speaker 2: to bed one morning thinking we own shares in a

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Speaker 2: business that had followed a uniform strategy for about twenty years.

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Speaker 2: You know, James Hardy was all about growing its share

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Speaker 2: of the fiber cement cladding mine over in the US

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Speaker 2: houses a clad with really rudimentary materials. It can be

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Speaker 2: something like plywood, vinyl, very cheap stuff. And so James

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Speaker 2: Hardy has come up with this fiber cement product that

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Speaker 2: is as much more durable, it is relatively cheap to manufacture,

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Speaker 2: and they've spent twenty years creating these distribution points to

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Speaker 2: get to increase penetration of this fiber cement product. Now

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Speaker 2: they are ninety percent of the fibers cement market, and

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Speaker 2: as that fiber cement becomes more and more popular as

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Speaker 2: a cladding product in the US housing market, James Hardy

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Speaker 2: has been an incredible success story of the last ten

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Speaker 2: fifteen years, and that's what we thought we were buying. So,

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Speaker 2: as I said, I went to bed one morning pretty

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Speaker 2: happy that that was the investment case. We work up

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Speaker 2: the next morning and James Hardy had just made a

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Speaker 2: wild acquisition of a company that had nothing to do

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Speaker 2: with cladding, without any consultation or warning to investors that

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Speaker 2: it was doing something completely different, and it had paid

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Speaker 2: an absolute motza for this business. It was raising debt,

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Speaker 2: and it was imperiling the entire business doing something new.

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Speaker 2: When I saw that news, we immediately sold the shares

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Speaker 2: and I wrote a note to clients and the heading

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Speaker 2: of that note was WTF James Hardy, And that's exactly

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Speaker 2: how I felt. I mean, I think, as I said,

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Speaker 2: we went to bed thinking we owned one thing, we

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Speaker 2: work up thinking we owned realizing we owned something else.

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Speaker 2: And for me, I think this management team may go

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Speaker 2: down as being the managers that destroyed a venerable, amazing

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Speaker 2: growing business. And the sin here is over ambition and overreach.

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Speaker 2: The plan was working, they had a strategy that was

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Speaker 2: doing very well, and in the pursuit of higher growth

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Speaker 2: and more profits and debt loads, I think they have

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Speaker 2: really they've lost the trust of the market for one,

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Speaker 2: certainly my trust as an investor, and they've ruined the

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Speaker 2: economics of what was a wonderful performing business. So this

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Speaker 2: is a really tragic tale. You know, James Hardy works

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Speaker 2: so hard after all the controversies over it's asbestos and

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Speaker 2: it's difficult pass. It's worked so hard at redemption, and

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Speaker 2: in one stroke it's back in the sinbin.

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Speaker 1: Okay, So you said that they've lost your trust? Is

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Speaker 1: there any way that I mean, have they destroyed the

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Speaker 1: business that much that at the current valuation, which is

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Speaker 1: way lower than what it was twelve months ago, there's

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Speaker 1: not an opportunity in there? Or is this far so

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Speaker 1: the new business so far away from its core business

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Speaker 1: that it actually can't win.

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Speaker 2: That is the key question. At every point, for every sin,

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Speaker 2: there is a price that's worth paying. And yes, the

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Speaker 2: calculation we must now think about is at what price

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Speaker 2: are we happy to forgive these sins of James Hardy

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Speaker 2: now that the problems really are that the debt. James

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Speaker 2: Hardy always ran a cyclical business with a clean balance sheet,

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Speaker 2: and that's the way you're supposed to do it. But

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Speaker 2: because they've taken over another cyclical business and there's no

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Speaker 2: question they pay too much for probably two or three

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Speaker 2: billion too much for that business, and they've taken on

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Speaker 2: debt to do it, that cycle has now gone down.

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Speaker 2: So they're now entering a difficult part of the cycle

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Speaker 2: with a debt loaded balance sheet and this is where

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Speaker 2: things could get dangerous for them if things don't improve

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Speaker 2: rather quickly. For James Hardy, the downside is just so

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Speaker 2: much larger than it used to be. I think we

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Speaker 2: bought with confidence in the past because you know, cycles

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Speaker 2: come and go. If things are bad this year, they'll

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Speaker 2: get better in a few years. But when you have debt, Shawn,

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Speaker 2: it just changes the equation completely. If they have to

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Speaker 2: raise capital, if they get in trouble with banks. There's

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Speaker 2: a lot more downside to come, so we're being a

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Speaker 2: lot more disciplined with price. And I think all these

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Speaker 2: shenanigans over trying to take the company over to American

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Speaker 2: listing and not consulting with investors, some of the incentive

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Speaker 2: payments made to management. It's not just about a bad takeover.

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Speaker 2: It's a long list of unfavorable management conduct and it

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Speaker 2: all comes together in making it very difficult to trust

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Speaker 2: management at this point. I would say it's even though

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Speaker 2: the share price does look attractive in terms of traditional valuation,

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Speaker 2: it is hard to buy the stock now. It's still

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Speaker 2: a sell and avoid for me.

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Speaker 1: Grev thank you for talking to Fear and Greed summer series.

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Speaker 1: Thank you, Sean as a Groa, Saidy, deputy head of

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Speaker 1: research at Intelligent Investor. Don't forget to follow on the podcast.

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Speaker 1: New episodes every day during our summer series, and regular

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Speaker 1: shows are back from January twelve. I'm sure I on that,

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Speaker 1: and this is Fear and Greed