Forex Investment

FALLOUT from the US housing market downturn has hit Australia’s two largest building material companies, after James Hardie and Boral warned that their US earnings will be crimped this year.

James Hardie has forecast a fall of up to 16 per cent in full-year operating profit to $US187 million ($A223 million) because of weakness in the US.

The forecast does not include the possibility of a “significant” deterioration in a market where it derives about 80 per cent of its sales.

Boral, which is less exposed to the US, expects brick and roof tile sales to fall there because fewer houses are being built. But Boral will not give an earnings forecast until at least October because of volatile conditions in its key markets.

The subprime mortgage crisis has exacerbated concerns about the US housing market, where construction of new houses is predicted to fall as much as 10 per cent to 1.4 million in 2007-08.

But James Hardie shares defied the dismal outlook in the US and a market slump in Australia yesterday, closing up 17 at $7.67, still almost 25 per cent off a high in February.

Investors pushed the shares up after James Hardie posted a stronger than expected 10 per cent rise in net operating profit to $US39 million for the first quarter despite “very challenging market conditions”.

The announcement of a long- awaited buyback of up to 10 per cent almost 47 million of its issued shares to correct its “lazy balance sheet” also propped up the shares.

James Hardie chief executive Louis Gries said the first-quarter performance could not be maintained for the rest of the year because the company had benefited from US builders buying products in anticipation of an improvement in the housing market, which did not eventuate.

“It’s more of a timing issue we had a perfect storm,” he said of the quarterly result yesterday.

Mr Gries declined to predict the impact of the meltdown in the subprime mortgage market on James Hardie. But he said indicators of building permits and builder confidence levels suggested further weakness in the short to medium term.

“It’s just too hard to predict what is going to happen but we are not in panic mode,” Mr Gries said, adding that a 10 per cent fall in housing starts in the US would crimp demand for James Hardie’s products by 7 per cent.

Boral reported a drop of almost 18 per cent to $298 million in net profit for the full year because of a “significant decline” in US earnings. In Australia, the company suffered from reduced earnings from building products due to ongoing weakness in housing activity.

“It’s too late to sell Australian building materials companies on concern for the US housing market,” said Southern Cross Equities head of research David Whittaker.

Boral, which does not expect a recovery in the US market for another year to 18 months, declared a final dividend of 17 a share payable on September 18, taking the total payout for the year to 34.

Boral shares fell 12 to $7.15.