The construction industry is experiencing a period of meaningful commodity price inflation, explains Citi. While the spike in costs may be transitory, it’s felt current levels will likely underpin higher housing inflation for at least the nine months through to March quarter 2022.
The broker thinks the ability to offset this via price rises and cost savings will be limited, driving margin pressure. It’s estimated an additional 5% increase in raw material costs would equate to an average -10% earnings (EBIT) headwind to FY22 estimates.
The biggest earnings risk in the sector is to James Hardie Industries, given the majority of materials is purchased on the spot market. The Neutral rating and $42.30 target price are maintained.
Sector: Materials.
Target price is $42.30.Current Price is $43.90. Difference: ($1.60) – (brackets indicate current price is over target). If JHX meets the Citi target it will return approximately -4% (excluding dividends, fees and charges – negative figures indicate an expected loss).
