James Gruber: Esther, we're here to talk about the building materials sector. Residential property in Australia is significantly undersupplied, which means we need to build a lot more homes over the next decade. This should be good for housing suppliers such as building materials companies, shouldn't it?

Esther Holloway: Yeah, in theory, it should. I mean, if we're building more houses, then we need more supplies. But at the end of the day, to build more houses, we need quantity of land, infrastructure, labor, building supplies, and we don't necessarily have all of those things. In addition, we've got to get the council and local state government needs to help with infrastructure and density planning and all of those kinds of things to make it easier to build the new houses. So, yeah, although we do have – it would be great for building products, we've got a few moving parts to get in line before that would come through.

Gruber: You've kind of answered my next question partly in that we haven't seen that build-up, even though it's been talked about for at least 12 months, we just haven't seen the ramp up in that building.

Holloway: Yeah, I think a lot of that comes down to the cash rate. So, between March 2020 and 2022, so over two years, we had a cash rate below 0.5%. So that made building quite attractive, low finance, there was a homeowner's – homebuilders grant, which was taken up by at least 100,000 people. So, there were quite a lot of structural things going on that made building attractive in the past, but now we're seeing the cash rate much higher. So, we're seeing about up to under 14,000 houses approvals every month at the moment over this year. And we haven't seen numbers that low in over 10 years. And I look back on the cash rate then, and it was very similar to what it is now. So that, kind of, I think explains it as when finance is expensive, both developers who build before they sell, and consumers are just holding back and waiting a little longer. Yeah.

Gruber: Let's get into some of the stocks that you're covering. They're quite a diverse bunch. Can you run through the ones who operate primarily in Australia and New Zealand, namely, Adbri, Fletcher, Brickworks? Which one out of those do you prefer?

Holloway: Okay. Yeah, those stocks are all relatively different. So, we've got Fletcher and Adbri, which are both exposed to residential cyclicality. And of course, we do have Brickworks as well. But something that's interesting about Brickworks is that although it does have market share in Australia, along with CSR, they supply most of the bricks and that's very exposed to residential, a lot of the company's earnings actually come from its other businesses. So, we've got property, which is developments they're doing, mainly warehouses with Goodman Group in a joint venture. And we've also got their investment arm, which is their cross-shareholding with Soul Pattinson. So, at the end of the day, there's a tendency to look at the companies and say they're exposed to residential. But Brickworks, I think, has just got something a little different going on there.

Gruber: Reece has been phenomenally successful in Australia and is building out aggressively in the U.S. How is that going and what's your view on the stock?

Holloway: Yeah. So, Reece entered the U.S. about five years ago. And from the start, management has said it's structurally different over there. They don't expect to replicate the results of Australia straight away. So, there's a few things different about over there. So, for instance, the businesses that they've acquired over there are not as exposed to residential and redevelopment, which is where sort of their bread and butter over in Australia. They also haven't introduced that same level of private label goods like they have over here. They've been here for a long time. They've had a lot of time to establish that. And then distribution is a little different. The stores are much more spread out. So, they don't have that scale benefit that we see in Australia. So, consequently, the margins are quite a bit lower in U.S. So, that's what we're seeing play out over there. As for my view on it, we think the Australian operations are fantastic, as you said. But the U.S., we think that they might have spent a bit too much on that, and we're seeing that come through with the return on investments, which seems to be below our cost of capital. Yeah.

Gruber: And the big gorilla in building materials is James Hardie, which also has extensive operations in the U.S. That's had a big run up over the past year after being depressed. What's your view on the stock there?

Holloway: Yeah, it has. The stock price for that has almost doubled over the course of the year, which is…

Gruber: Wow.

Holloway: …yeah, wow. It's also really exposed to residential. A lot of it is the cladding on the side of houses. So, we expect that it will have single-digit percentage growth. And from a macro perspective, the residential will have single-digit growth. We're forecasting about 1.3 million new house starts this year, and that will rise up to about 1.4 in the next few years and stay about that level.

Gruber: And James Hardie has got a nice economic moat combined with that that should lead to some growth going forward.

Holloway: Yeah, correct. So, James Hardie is a wide moat company. That comes from a couple of things. We've got the intangible asset. It's just the brand is so well known and recognized. People will pay a premium to side their house with a James Hardie product because it also features more at resale. And so, people are quite happy to pay that. And we've even seen that through the cycle when they're still gaining market share despite residential construction lower than it had been. And then we've also got the cost advantage. In America, they have big warehouses, factories developing new James Hardie product. They're located close to where the demand is, where the customers are, and that cuts down on the transportation costs. So, yeah, it's got some great fundamentals that company, yes.

Gruber: All right. Thank you for the wrap up of the building materials sector.

Holloway: Okay. Thank you.