Wednesday 21st February 2018
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Fletcher Building shares touched their lowest levels in more than five years after the company's first-half results, which were clouded by losses at its Building + Interiors unit but also showed soggy demand at its most profitable businesses over the next 12 months.
The stock recently traded down 2 percent at $6.72, having sunk as low as $6.50 after the results. The big one-time items including B+I operating losses of $631 million in the first half had been revealed in a profit warning last week that saw the resignation of chair Ralph Norris. Today it reiterated guidance for full-year earnings excluding B+I of between $680 million and $720 million.
Building products, Fletcher's biggest business, lifted revenue by 13 percent to $1.25 billion although operating earnings fell 9 percent to $118 million. Distribution, which includes the Placemakers chain, lifted revenue by 7 percent to $1.6 billion and earnings before interest, tax, depreciation and amortisation rose 8 percent to $104 million.
In a presentation to investors, the company rated the 12-month market outlook for all of its businesses. For both building products and distribution it gave the same assessment as the outlook. In New Zealand, low growth in the residential market, flat demand in commercial and growth in infrastructure. In Australia, it sees flat demand in residential and commercial and low growth in infrastructure for both building products and distribution.
The outlook was also low-wattage for its international division, which includes Laminex in the ANZ region, Formica in offshore markets and its steel roofing tile business. For New Zealand it sees low growth, the Australian market is expected to be flat, North America and Europe low-growth and Asia showing growth.
The residential and land development division achieved ebitda growth of 57 percent to $47 million in the first half as revenue grew 45 percent to $236 million on a big uplift in sales of houses and sections. And the ebitda/gross revenue improved to 20 percent from 18 percent.
But in assessing the market outlook it sees low growth in activity in low-density developments and zero growth in demand in high-density properties. For Christchurch, the outlook for low and high-density developments was seen as flat.
The loss was $273 million in the six months ended Dec. 31, from a profit of $176 million a year earlier. Sales rose 6 percent to $4.89 billion. The results show a loss of $322 million on an operating earnings basis, which included B+I losses, from a profit of $294 million a year earlier.
Chief executive Ross Taylor said the 12-month outlook didn't indicate he was downbeat about Fletcher's prospects. "Certain sectors may be at the top of the cycle but that's not my view of the broader Fletcher Building," he said on a conference call. "I see strong growth opportunities within the business. Particular sectors might be challenged but other markets are picking up."
Taylor said he would provide a more detailed assessment of Fletcher's businesses in June and has hinted there could be asset sales or other changes to the company's balance sheet.
For the housing business, he said he has been "very impressed" with the company's model and how it was run but there was a question of how much of Fletcher's balance sheet should be tied up in it. "The main question for me is the balance sheet. That's the discipline I'm going through."
Taylor said in the statement to the NZX today that outside of B+I, the broader Fletcher Building business "continues to perform to guidance. "While it is pleasing to see an increase in sales revenues, operating earnings have decreased due to lower profits in the construction division, outside of B+I, as well as the building products division."
Construction, ex-B+I, recorded an 83 percent drop in earnings before interest and tax to $12 million. Taylor said its infrastructure and South Pacific businesses are "rolling off major projects from FY17, and we are only in the early stages of new ones." Total revenue in the construction division fell 13 percent to about $1 billion.
Growth in activity in the second half "is expected to be limited, particularly with the New Zealand building sector operating at or near capacity."
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