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Fletcher Building braces for tougher year

Thursday 25th September 2008

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Fletcher Building, the biggest construction and building supplies company on the NZX 50 Index, is bracing for a tougher year as demand weakens in its major markets.

The stock has declined 37% this year, underperforming the benchmark index on delays in restructuring its Formica unit and dwindling demand for housing in New Zealand and Australia. Chief executive Jonathan Ling last month declined to forecast 2009 earnings, after posting a 10% gain in 2008 EBITDA.

"There is little doubt that we are in for a tougher
year than the one just experienced," chairman Rod Deane said in the company's annual report, released today. "We are managing our businesses with a focus on cash flow and to maintain financial strength."

Fletcher acquired Formica in July last year for about NZ$1 billion, making it the world's largest producer of laminated board and gaining a brand with high recognition in the US Since then, a US housing recession has eroded demand, with some economists predicting the world's biggest economy is heading for a contraction.

"We face very difficult markets in New Zealand, the US, the UK and Spain, deteriorating markets in Australia and softening markets in Asia," Deane said.

Still, the diversity of Fletcher's businesses across geographic and sector groups, and a strong balance sheet should help buffer the company from a downturn, he said.

In New Zealand, residential activity is expected to slow throughout the year while larger scale commercial building and infrastructure will probably be at similar levels to 2008.

In Australia, a slump in housing in New South Wales, the most-populous state, may be partly offset by demand in Queensland and Western Australia, Deane said.

No significant improvement is expected in the US market, Spain or the UK.

Fletcher Building is rated a "buy" or "outperform" by nine of 11 analysts who follow the stock. Two rate it a "hold." The company's stock trades 7.8 times earnings, almost half the PE ratio of Australian rival Boral.

By Jonathan Underhill

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