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Fletcher forecasts strong earnings uplift on back of NZ construction boom

Wednesday 17th August 2016

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Building and construction company Fletcher Building is forecasting a strong uplift in underlying earnings for 2017 in the range of $720 million to $760 million, mainly on the back of a boom in Auckland residential construction.

That compares to the $682 million in earnings before interest and tax, the company reported today in its results for the year ended June 30, 2016, a rise of 4 percent in line with guidance. Net profit rose to $462 million from $270 million the prior year, a 71 percent gain with a lift in New Zealand construction activity and a turnaround in its under-performing businesses in Australia. Total revenue rose 4 percent to $9 billion.

The latest results included one-time gains of $44 million relating to the sale of the Rocla Quarry Products offset by a write-off in its Formica India manufacturing assets and charges for plant closures. 

Fletcher broke with its usual practice when reporting results to provide guidance for 2017 which was in line with market expectations, said Andrew Scott, an analyst with Sydney-based RBC Capital Markets.

“We view this as a strong result, albeit partially assisted by asset sale gains. Fletcher remains well positioned to benefit from the strength in the New Zealand and Australian construction markets and we would agree with management’s view that NZ market strength may have more time to run than Australia’s,” he said.

Fletcher chief executive Mark Adamson said New Zealand residential consents are expected to peak in 2018, though the post-earthquake surge in activity in Christchurch has now reversed. There could be a lag which means peak activity occurs after 2018, he said, while non-residential activity is forecast to remain steady at elevated levels.

In Australia residential activity is expected to gradually decline after building consents peaked in December and little growth is forecast in non-residential activity, he said. Moderate growth is expected in the rest of the world.

The diversified company has completed restructuring the business, selling off unwanted assets and is now turning to what it dubs the “Accelerate” programme: essentially getting more out of what it has and completing the turnaround of under-performing businesses such as Iplex and Tradelink in Australia and Formica Europe. It also involves beefing up external procurement to take more advantage of Fletcher’s scale and introducing manufacturing efficiencies.

Since Adamson took over as chief executive four years ago he has replaced 50 percent of his senior leadership team (around 250 staff), something he said was necessary to boost performance as the company had “lost it way”.

Previous CEOs were keen to diversify earnings out of New Zealand through offshore acquisitions but Adamson said he prefers driving more growth in the assets it already has, given 80 percent of mergers and acquisitions destroy shareholder value.  The company paid $303 million this year for Higgins road construction.

“Higgins was a particular hole we needed to fill and we inherited great assets,” he said. “We’re now trying to grow organically because the best shareholder return is not spending a dollar, but getting a dollar out of the one already spent.”

New Zealand revenue rose 8 percent to $4.79 million, with a stellar performance from Steel Distribution up 22 percent under new management. New Zealand Residential operating earnings were $74 million, up 12 percent on the prior year with the decreased contribution from the Stonefields development in Auckland as it winds down more than offset by an accelerated build programme in other locations.

New Zealand residential consents are up 16 percent its year, with total work in place up 9 percent.  To cash in on the current housing shortage, Adamson said Fletcher had spent around a net $90 million on land this financial year and expected to do a similar amount in New Zealand next year. It plans to bring to market 1500 homes a year by the 2018 financial year, up from 300 currently.

Affordability of homes remains a concern, he said.

“When houses cease to be homes and become an investment, which is what we have got in Auckland now, it’s never going to end well,” Adamson said. “I experienced this when I lived in the UK and increasing supply is the issue which both sides of the political divide agree with industry on now and why we’ve spent $500 million of shareholders’ capital to that end.”

Adamson said he’s held talks with Finance Minister Bill English and Labour leader Andrew Little about doing more on social housing, including finding a better “staircase to ownership”.

It was announced in June that Fletcher will develop surplus Crown land in the Auckland suburb of Massey, adding 196 homes, including a third that will be made available for state housing. Adamson said the bigger prospect than developing greenfields sites was taking existing state housing and intensifying the number of homes on each section.

“You could take around 5,000 houses and build 15,000, that sort of thing, “ he said. “That’s what is needed to drive a ramp up in supply.”

Fletcher will pay a final dividend of 20 cents a share, fully tax paid on Oct.12 for holders as at Sept 23. Under a new dividend tax policy, it said New Zealand shareholders can expect fully imputed dividends through to 2019 because of expected stronger earnings. In Australia, it will fully frank final dividends  “where possible” though that’s unlikely to include the final 2017 payment.

Fletcher shares have risen 5 percent today to $10.05.

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