MARKETS SPECTATOR: Hardie housed in

James Hardie’s asbestos liabilities are not going away. If anything they are getting bigger.

The company made a net operating loss of $US69.5 million in the three months to March 31. Earnings before interest and tax in the quarter were negative $US108.3 million. At 11:11am AEST, its shares were down 15 cents, or 1.4 per cent, to $10.30 against a benchmark S&P/ASX200 Index slide of 1 per cent, or 50.665 points, to 5114.70.

The share of James Hardie’s costs related to asbestos rose to $US131.6 million for the quarter, compared with $US31 million a year ago. Selling, general and administrative expenses were $US58 million compared with $US48.9 million. Costs of goods sold were $US225 million compared with $US213.7 million.

Adding to liability woes, on April 16 the New Zealand’s Ministry of Education filed an action in the country’s High Court against two James Hardie units. James Hardie has not made any provisions but warned “losses and expenses arising from defending and resolving this claim may have a material adverse impact on the company’s financial position”.  

James Hardie’s estimate of its asbestos liability has increased to $1.69 billion as of March 31 compared with $1.58 billion from March 31, 2012,  a $114 million increase. The company says it expects “an increase in the projected future number of claims to be reported for a number of disease types”.

In 2013 James Hardie says “mesothelioma claims reporting activity has been above actuarial expectations for the first times since the 2009 financial year”. In the 12 months to March 31 new claims rose to 542, compared to 456 the previous year. Mesothelioma is a cancer caused by exposure to asbestos.

The average claim settlement was $231,000 in the 12 months to March 31, up $12,000 from the previous year and due to an increase in mesothelioma claims.

Putting aside its asbestos liability and court woes, James Hardie says it is optimistic about the future. It is spending $89 million on land and construction for a new fibre cement plant in Brisbane. Australian consumers and business will increasingly use composite building materials such as fibre cement in future construction, James Hardie says. The company also says it is increasing spending on its fibre cement operations in Europe and the US.

But the economic recovery in Australia and the US remains patchy at best, while Europe is in deep recession, despite central banks cutting interest rates to record lows. New building approvals in Australia, according to the Australian Bureau of Statistics, show that the number of dwellings approved have fallen in the first three months of 2013, in trend terms in March they declined by a further 1.2 per cent on February.

In the US, privately owned housing starts in April were at a seasonally adjusted annual rate of 853,000, 17 per cent below the revised March estimate of 804,000, according to the US government. Single-family housing starts in April were at a rate of 610,000, 2.1 per cent below the revised March figure of 623,000.

Meanwhile, James Hardie shares are trading at 31.52 times their 2013 estimated earnings compared to the S&P/ASX200 Index which is trading at 20.81 times, according to Bloomberg data. The company’s shares have gained 13 per cent in 12 months compared with the S&P/ASX200 Index’s 26 per cent rise.

It is unlikely, given the raft of legal and medical claims against James Hardie and the uncertain outlook for the building industry in its home market and abroad, that the company’s shares can do anything but underperform the market.