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Aussie housing downturn FBU's big challenge, says Jarden

Friday 28th June 2019

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Fletcher Building's credibility relies on delivering improvements in its Australian business before anything else, even though there are signs of a "major downturn" in the Australian residential construction sector and potential for a sustained patch of house-building in New Zealand, broking house Jarden says.

The company has made progress on a turnaround from two horror years in 2017 and 2018 when write-offs on under-priced major construction projects saw the firm withdraw from the vertical construction market under a new chief executive, Ross Taylor. Earlier this week he announced a $300 million share buyback and substantial debt reduction programme in an earnings guidance confirmation.

Jarden retained its neutral rating on the stock and lowered its 12-month target price to $5.17 from $5.43.

"Greater confidence in FBU's ability to improve returns in the Australian division" is identified as a positive catalyst for investors, as the company is focusing on "recapturing market share and doubling operating margins," Arie Dekker, head of research, said in a note today.

Long-term confidence that the Australian market would recover underpinned Jarden's willingness to be confident about the company's plans, but it would be looking for execution on the Australian strategy "before moves into adjacencies" as a key to building investor confidence.

"With the onset of what could be a major downturn in the Australian residential sector, that turnaround may take longer and be more challenging."

In New Zealand, Jarden sees potential for "a more sustained cyclical upturn in the residential sector that leads to a basis on which to assume a higher level of mid-cycle activity", albeit that activity has fallen back from previously high levels.

"We distinguish between upside associated with this cycle being stronger for another two or three years and the real valuation uplift that would come from believing in structurally higher activity" over a longer time frame.

The New Zealand government remains committed to large-scale house-building and expects to have fast-track legislation in place later next year to allow a step-change in construction volumes. However, as its struggles with the KiwiBuild affordable housing policy, which this week cost senior minister Phil Twyford the housing portfolio, such an uplift is proving challenging to achieve.

FBU's "key upside risks are a longer and stronger New Zealand building cycle and margin expansion on greater efficiencies/more benign competitive environment in New Zealand," Dekker wrote.

Fletcher Building this week affirmed earnings guidance before interest and tax of between $620 million and $650 million.

Fletcher shares fell 1.4 percent to $4.86. They have fallen 9 percent since the company's investor briefing on Wednesday and about 30 percent in the past year.


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