Fitch revises outlook for James Hardie to negative after AZEK acquisition plan

Investing.com -- Fitch Ratings has changed the Rating Outlook for James Hardie (NYSE:JHX) International Group Ltd. and its subsidiaries to Negative from Stable, following the company’s announcement of plans to acquire The AZEK Company, Inc. The transaction, valued at $8.75 billion, has led to concerns about increased and sustained EBITDA leverage for James Hardie. Despite this, Fitch has maintained James Hardie’s Issuer Default Rating (IDR) at ’BBB’.

The acquisition of AZEK will see shareholders receive $26.45 in cash and 1.034 ordinary shares of James Hardie stock for each share of AZEK stock. The cash portion of the transaction will be funded with debt, a move that will increase James Hardie’s EBITDA leverage to over 3x from 1.1x. Fitch, however, sees the acquisition as beneficial to James Hardie’s business profile as it enhances scale, diversifies product offerings, and increases exposure to the relatively stable repair and remodel (R&R) segment.

Fitch predicts that EBITDA leverage on a combined pro forma basis will be around 3.7x, compared with 1.1x for the LTM ending Dec. 31, 2024. The company’s leverage is expected to remain elevated at FYE2026 (ending March 31) and settle around 2.9x at FYE2027 before declining to 2.5x or lower by FYE2028. Fitch’s forecast assumes debt reduction and EBITDA growth in fiscal years 2027 and 2028.

James Hardie is expected to face a challenging demand environment in its end markets through at least calendar year 2025. Fitch projects that revenues for the combined company will improve by a low-single digits percentage in FY2026 and grow by a mid-single digits percentage in FY2027. The company is expected to benefit from higher pricing and ongoing material conversion for its products, offsetting volume weakness in the medium term.

Fitch calculates that on a combined basis, EBITDA margin is around 26.3%, excluding any potential cost synergies. EBITDA margins are expected to settle between 25.5% to 26.5% in FY 2026, 27%-28% in FY2027 and 27.5%-28.5% in FY2028. Fitch’s forecast also assumes synergies of $25 million-$35 million in FY2026, $70 million-$80 million in FY2027 and $105 million-$115 million in FY2028.

Fitch projects James Hardie to generate an FCF margin of 7%-8% in FY2026, 10%-11% in FY2027 and reach 11.5%-12.5% in FY2028. The company is expected to use FCF to repurchase $500 million of its stock within 12 months after the acquisition and $500 million of debt reduction in FY 2027.

After the acquisition, James Hardie will hold leadership positions in the fiber cement siding and backboard and the residential outdoor living market. The company’s end-market and geographic diversity will help mitigate regional and end-market downturns. The addition of Azek will expand James Hardie’s product offerings.

James Hardie is obligated to make payments to the Asbestos Injuries Compensation Fund (AICF). Fitch’s forecast assumes annual AICF contributions of about $100 million. This amount is subtracted from Fitch’s EBITDA calculation.

James Hardie’s leverage metrics, including EBITDA leverage of 1.1x, are stronger than investment-grade building products peers. However, James Hardie has lower revenue and narrower product offerings than these peers, and it also has less end-market diversification.

Key assumptions include the closure of the AZEK acquisition during mid-year FY2026, organic revenue growth of low single digits in FY2026 and mid-single digits in FY2027, and EBITDA leverage around 3x at FYE2027 and at or below 2.5x at FYE2028.

Factors that could lead to a negative rating action include EBITDA leverage sustained above 2.0x, (CFO-Capex)/Debt sustained below 15%, FCF margin below 3%, and a meaningful change in the company’s obligations to fund its asbestos liabilities. An upgrade is unlikely in the intermediate term given the company’s size and narrow product offering.

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