Australia | Apr 03 2013
-NZ building heavily reliant on Christchurch
-Oz building spurred by lowered cash rate
-What balance can Fletcher Building find?
By Eva Brocklehurst
Building activity in Australia and New Zealand looks set to ratchet higher. This spells good news for those stocks in the sector, particularly Fletcher Building ((FBU)) which strides both countries. The difference between the two countries is that the recovery is more regional in New Zealand, led by the rebuilding of Christchurch after the earthquake and a recovery in Auckland's housing market. Credit Suisse notes, in contrast, Australian home buyers and builders are responding to the significant reductions in the Reserve Bank's cash rate to date. The analysts believe weak business confidence will hold back non-residential building activity in Australia.
New Zealand housing consents rose 24% in the year to February and this improvement is a key indicator for housing starts and, ultimately, demand for materials. CIMB believes the recovery reveals increased momentum in Christchurch's reconstruction. Christchurch building consents rose 104% in February and for the six months to February were up 242%. Excluding earthquake related consents, NZ residential construction activity was up 22% in February. Fletcher is the broker's preferred pick in the building materials sector. CIMB cites the "three Cs" as underpinning Fletcher's outperformance. These are Cycle, Christchurch and Cost-out. Nevertheless, the broker views the sector as fully valued and considers Fletcher a relative rather than absolute opportunity.
Credit Suisse is a bit cautious about the breadth of the NZ housing recovery beyond Auckland and Christchurch, while capacity constraints may loom by 2014 in terms of the rebuilding. Moreover, identifying just how much is housing related, Credit Suisse notes NZ non-residential building consents were down 17% in the year to February. Based on several factors, including stock-to-sales ratios, economic activity and employment prospects, the analysts at Credit Suisse do not believe the strength of the Auckland housing market will spill over into other regions in the near term. UBS sounds another note of caution, flagging statistics which show the cost of NZ dwelling construction is rising at the fastest pace, 3.1% year-on-year, since 2008. UBS also notes that spending on house building and fit-out in Christchurch is underpinned by insurance payouts. Fewer implications can be drawn in terms of overall household confidence.
In Australia, residential building approvals have trended down slightly over recent months, notes UBS. The analysts concur with Credit Suisse that low interest rates will prod housing sentiment and, indeed, this has surged to a three-year high. UBS looks for a 1% month-on-month bounce to a 157,000 annualised pace of building approvals. Again, the question is non-residential building and whether that can recover too. Citi has been bothered by the depressed construction market in Australia and, noting that half Fletcher's earnings come from Australia, downgraded Fletcher recently to Sell. The good news is that the post-earthquake rebuilding should underpin the NZ earnings for the next decade, at least in Citi's opinion.
Credit Suisse finds Fletcher worthy of a Hold rating, expecting NZ will underpin the company's building volumes in the next 12 months. Credit Suisse joins two others including UBS with a Hold rating on the FNArena database. There are three Buy ratings (including CIMB). Those with Sell ratings include Citi and JP Morgan.
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