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Are Fletcher's NZ earnings at the top of the cycle?

Thursday 22nd August 2019

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Fletcher Building says activity in all parts of its New Zealand markets is “elevated’’ but its managing director doesn’t want to say whether current earnings should be viewed as top-of-the-cycle results.

And he doesn’t like the suggestion that mid-cycle earnings are likely to be somewhat lower.

“The market outlook for 2020 looks pretty similar to last year,” Ross Taylor says.

“I don’t have any particular insights into the next five years” but all the indicators, including the strength of the government’s balance sheet, immigration levels and population growth, and the infrastructure pipeline suggest current conditions continuing, although residential construction may ease slightly.

“Every time I try and forecast, I get it wrong. Should the cycle change, we need to react and deal with it,” Taylor says.

The company reported earnings before interest and tax within guidance at $631 million for the year ended June, but the ebit of each of the ongoing New Zealand divisions was mostly flat to down.

About two-thirds of the company’s future revenue will be from New Zealand and the rest from Australia where ebit halved to $57 million, as previously disclosed.

But Taylor says the company is making great progress, with the construction business stabilised – it lost nearly $1 billion in 18 months – and having staged a “solid intervention” to get the Australian business on track to deliver better results over the next few years.

“Through all of that, we kept our New Zealand businesses on track and they’ve performed” and Fletcher has also reduced debt and reinstated dividends – it will pay a final unimputed dividend of 15 cents per share, taking the annual payout to 23 cents.

“It was a very solid and successful year for Fletchers from where it was a year ago,” Taylor says.

Fletcher’s results presentation says the current annual housing consents of about 35,000 is the highest since the mid-1970s, supported by ongoing population growth of about 2 percent and a net gain of about 50,000 migrants.

It says national house prices are stable and that sales of Auckland homes in the $650,000 to $1 million range that it targets remain stable.

Commercial activity is at historic highs with the annual value of work put in place at more than $8 billion with high growth rates across most regions.

Infrastructure activity is also at historically high levels, although the pipeline in projects slowed in the past 12 months as the government’s focus shifts from large roading projects towards road safety upgrades, rail and water, the company says.

The New Zealand divisional results included ebit from building products down to $127 million from $132 million the previous year, while the distribution division was unchanged at $104 million.

Boding ill for Steel & Tube Holdings’ results, which are due on Friday, the steel division ebit fell to $33 million from $49 million. Concrete division ebit fell to $84 million from $90 million.

Fletcher’s residential and development division was the lone bright spot, lifting ebit by $1 million to $137 million, while the construction division returned to profit with ebit of $47 million.

The last “normal” year for the construction division was in the year ended June, 2016 when ebit was $78 million.

Although the B+I losses continue to impact cash flow, they were all provided for in the 2018 financial year and the company has repeatedly said the losses remain within those provisions.

Precinct Properties New Zealand, owner of the Commercial Bay project Fletcher is building, said last week that it is withholding $34 million from Fletcher because of delays to the project.

Taylor told analysts that while he won’t comment on specific projects, the amount withheld falls within the overall provisions.

Fletcher is forecasting residential consents in Australia will fall to 150,000-160,000 in 2020 from an estimated 185,000 this year and 232,000 in 2018.

Taylor says the reported recent improvement in sentiment in the Australian housing market hasn’t flowed through to Fletcher’s order book yet. He expects it will take four-to-six months before any such improvement translates into product sales.

Asked whether the company’s consents forecast is a worst-case scenario, “I really hope so,” Taylor says.

Fletcher’s results were well-received on the day, the shares closing at $4.72, up 3.3 percent but down from the day’s high at $4.80. The shares have fallen about 35 percent in the past year compared with the benchmark S&P/NZX 50 Index’s 18 percent gain.


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