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Potential for further Fletcher profit downgrade

Wednesday 18th January 2012

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Fletcher Building, New Zealand’s largest construction company, faces market speculation of a further profit downgrade, amid a weak housing market and new delays in the rebuild of Christchurch following a swam of earthquakes on Dec. 23.

Fletcher stocks tumbled 23 percent last year to a 2 ½ year low of $5.86 per share, after the company announced earnings would stall this financial year, with no signs of pick up in residential building in Australia and New Zealand. Its shares are currently trading at $5.92.

“It is one of the things circulating around the market,” said Alan Moore, director at Milford Asset Management. “Based on the fact that building activity has dropped, it will be more difficult for them to meet the latest projections.”

“If you are brave it is probably a good stock to hold onto, but if there was another downgrade it probably won’t be well received by the market.”

In October, Fletcher forecast its 2012 half year result to be around 10 percent lower than the $166 million net earnings for the prior year comparable period.

For the full-year ended June 30, 2012, excluding one-time items, profit is predicted to be in line with 2011’s $359 million. The Auckland-based company will release its earnings in February.

The New Zealand Institute of Economic Research’s quarterly survey released today, showed local trading activity had slowed and business confidence dimmed in the December quarter.

Fletcher has the mandate to oversee the Christchurch rebuild, but expectations that reconstruction in Canterbury would pick up in second half of 2012 are in doubt after the latest round of earthquakes, which are likely to further delay the re-entry of insurers to the Christchurch market.

“The rebuild is a big driver for Fletcher’s earnings,” said Craig Brown, senior investment analyst at One Path New Zealand. “You can’t rule out conditions remaining tough for an extended period of time – so you couldn’t rule out further downside risk in the share price.”

NZX listing rules require Fletcher not to speculate publicly about their profit outlook unless they inform the whole market, which they have to do through the NZX platform in a formal statement.

A spokesperson for the company told BusinessDesk “there’s no further update to the guidance we provided the market in October for the likely half year and full year earnings.”

Last week, Fletcher tapped private US investors in a US$300 million debt placement to repay bank loans. Debt was sold at two maturities of 10 and 12 years the proceeds of which will be used to repay borrowing drawn under its principal bank facilities.


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