Were there any changes to super announced in the Budget? Why has James Hardie fallen so much following the announcement of its takeover of AZEK? Should I take profits on APA? Is the worst over for lenders’ mortgage insurance provider Helia?
Question 1: Were there any changes in the budget impacting super?
Answer: There were no changes to the superannuation contribution caps for FY26. These remain at $30,000 for concessional contributions (super guarantee, salary sacrifice etc) and $120,000 for non-concessional contributions (personal contributions for which you do not claim a tax deduction). The super guarantee charge rate (for compulsory super) increases from 11.5% to 12% on 1/7/25.
The transfer balance cap is the lifetime limit on how much money can be transferred into the retirement phase of super. This will increase from $1,900,000 to $2,000,000 on July 1. The Government did not mention its plan to apply a higher tax rate to super balances over $3,000,000. Legislation is currently stalled in the Senate. If an election is called, this legislation will lapse, and it may be the last we hear of the proposal.
Question 2: Why has James Hardie fallen so much following its takeover announcement regarding AZEK? What do the brokers think?
Answer: James Hardie is proposing to buy US listed AZEK, a leading producer of decking accessories, railing and PVC trim, through a scrip and cash offer. If the transaction is successful, James Hardie shareholders will own 74% and AZEK shareholders 24% of the combined entity.
James Hardie says the two companies’ products are highly complementary, it will increase the exposure to the more stable “repair and remodelling” market (as opposed to “new home sales”), and there are significant cost and revenue synergies. It estimates the cost synergies at US$125m and the revenue synergies (by FY30) of $US$225m. It says the deal is EPS accretive in its first full year of operation.
The market, however, thinks they are paying too much. Some brokers say that the deal is dilutive in FY26 and FY27, James Hardie is taking on too much debt, and the revenue synergies are too far down the track and/or too optimistic.
The market crunched the stock, taking it down by about 20%. Most brokers cut their target price, with Macquarie (for example) going from $65.00 to $44.00. That said, the consensus target price still sits significantly higher at $54.15, about 42% higher than the last ASX price of $37.96.
Question 3: I piled into APA around the $6.60 level. It is now trading around $7.80. Should I take some profits?
Answer: Suddenly, everyone seems to like APA again. Maybe it is the high yield, maybe it is the lack of investment alternatives. Not much has changed, although it did marginally beat forecast earnings in February and probably dispelled the risk of having to raise capital.
I am a little wary of the analysts on APA because they have been pretty wrong in the past. Now, they have gone a little bullish, although the consensus target price of $7.80 is bang on the ASX share price. I think $8 may be a profit taking area. At this price, the stock is trading on a prospective (unfranked) yield of 7.1%.
Question 4: Do you think the worst is over for Helia (HLI)?
Answer: Helia is the old Genworth Insurance business that provides lenders mortgage insurance (LMI). It has just announced that it will lose its biggest customer, Commonwealth Bank, from the start of FY26. In FY24, CBA was responsible for 44% of Helia’s gross written premium. The impact on Helia will be phased, with potentially some insurance contracts running out to 15 years. However, Helia will need to replace this premium. In the meantime, it has said that because it will need less capital, it may be in a position to return this to shareholders via a buyback.
Only 1 major broker covers the stock. This is Macquarie, who cut their target price on the news to $3.55. This is 7.8% less that the last ASX price of $3.85.
On Macquarie’s analysis, HLI is trading on a multiple of 6.5x FY25 forecast earnings and 7.4x FY26 earnings. It is also yielding a prospective 18.7%.
Helia looks super cheap, but when you are going to lose 44% of your revenue over the next several years, it needs to be! I would take Macquarie’s view of value and pass on the stock. Not a buy.