Monday 11th February 2019
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Fletcher Building is likely to pay a 30 cents per share dividend for the year ending June and the payout will be skewed to the second half after the US$840 million sale of Formica has settled, says FNZC analyst Arie Dekker.
Fletcher, which is due to report its first-half results on Feb. 20, said when it announced the Formica sale that it would resume paying dividends from the first-half payout this year.
Fletcher’s last payout was the final dividend of 19 cents per share for its 2017 financial year when it paid out 39 cents in total.
Dekker has raised his forecasts for the building products and construction giant but, because his assumptions assume a reversion to mid-cycle conditions from the current elevated levels, Fletcher’s earnings progress is unlikely to be very exciting for the next three years.
“We don’t try and pick the cycle. We factor in a reversion to mid-cycle,” Dekker explains. He says a key upside risk to his forecasts are that New Zealand has a longer and stronger building cycle and that Fletcher manages to expand its margins in Australia, which could also be a more benign competitive environment than he is assuming.
He is forecasting net profit for the year ending June will come in at $384 million, a considerable lift from his previous forecast of $312 million.
That’s a big turnaround from the $190 million net loss Fletcher reported for the June 2018 year and the scant $94 million net profit it reported for the 2017 financial year.
Both the previous two results were hit by the near $1 billion losses from the high-rise construction arm, Building + Interiors.
For the year ending June 2020, Dekker is forecast an almost flat net result of $387 million, falling to $362 the following year.
A key part of Fletcher’s strategy is to lift the margins of its Australian businesses to match those achieved in New Zealand.
“With a number of Fletcher’s Australian businesses having performed relatively poorly with relatively modest earnings, it is difficult to understand just how much they will be impacted by the downturn in activity in Australia,” Dekker says.
“The more interesting area of interest in the next six to 12 months will be whether the downturn impacts the investment decisions Fletcher has indicated it will make in the Australian business as it looks to turn it around and improve earnings,” he says.
“It is unlikely that any major commitments have been made at this point and the cycle in Australia could influence plans.”
As for the local construction cycle, he is expecting residential building consents to revert to a long-run average of 25,000 a year by 2022, down from about 33,000 currently.
But there’s a risk consents could fall much further – Dekker notes that in the last cycle, consents bottomed out at 15,000 a year.
Fletcher’s residential building division accounted for about 12 percent of earnings before interest and tax in the year ended June 2018. Dekker is forecasting it will account for 14 percent this year, up from 6 percent in 2012.
Fletcher has grown the number of housing units from 200 a year to about 700 over the past decade and is aiming to increase that to 1,000.
Dekker says the residential division has performed well over the past decade against a backdrop of supportive market conditions. But margins have declined during the past three years and return on capital is sitting around the cost of capital.
He says Fletcher has shifted its focus toward smaller dwelling types at lower price points which offer greater affordability while providing higher yields and margins.
Given the uncertainties, Dekker isn’t factoring in any benefit from the government’s KiwiBuild programme, although Fletcher is clearly well placed to participate in it.
Fletcher shares closed at $4.04 on Friday, up from their $4.54 low last November but still down more than 32 percent from a year ago.
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