Australia | Sep 29 2011
– Analysts visit Crane Group assets of Fletcher Building
– Integration going to plan but macro conditions have weakened
– Potential for expected target timetable to slip
By Chris Shaw
Having recently acquired Crane Group, Fletcher Building ((FBU)) has held a site tour for broking analysts that has offered some additional insights into how the new assets are fitting into the group.
In the view of BA Merrill Lynch the integration of Crane Group has to date gone smoothly. This implies synergy benefits are being realised, Citi noting total annual realised synergies across the Corporate and Group Procurement operations are estimated at $16.6 million. Citi sees potential for further benefits to be achieved.
At the time of the acquisition management at Fletcher Building had set a target of 15% return on funds employed from the Crane Group assets, to be achieved by FY16. The site visit saw this target reiterated, as Deutsche Bank notes management are positive on the upside potential of the new businesses.
Increased earnings from the Pipelines and Tradelink businesses are expected to drive the achievement of this target, though Citi sees scope for some slippage in timing terms given macro conditions have worsened since the Crane Group assets were acquired.
As an example, Citi points out margin recovery in the Trade Distribution business is largely volume dependent. This is driven to a significant extent by residential and commercial construction levels, where the shorter-term outlook remains less than favourable. This will be offset to some extent by new supply contracts won in the Queensland Coal Seam Gas market.
According to BA-ML, the significant macro headwinds currently in place suggest Fletcher Building is unlikely to generate cost of capital returns from the Crane Group assets for at least the next four years. On BA-ML's numbers the assets need generate EBIT (earnings before interest and tax) of $129 million to meet the cost of capital, which compares to the $71 million achieved in FY11.
Allowing for the tough market conditions, BA-ML remains of the view Fletcher Building shares offer reasonable value at current levels given an earnings multiple of 13 times for FY12 and a solid balance sheet.
What drives the Neutral rating of BA-ML is a belief any recovery in building activity in Australia and New Zealand is unlikely before FY13. As well, the fact the New Zealand assets appear to have reached a terminal market position suggests it will be the Australian market where any organic growth occurs.
Deutsche agrees with BA-ML and rates Fletcher Building as a Hold on valuation grounds. Citi is more positive and retains a Buy rating on Fletcher Building, a share price target of NZ$9.35 implying an expected share price return of almost 24% relative to current trading levels.
Overall the FNArena database shows brokers are evenly split on Fletcher Building, with four Buy ratings and four Hold recommendations. The consensus price target according to the database is $6.80, unchanged from prior to the update.
Shares in Fletcher Building today are weaker and as at 1.00pm the stock was down 7c at $5.95. Over the past year Fletcher Building has traded in a range of $5.62 to $7.11. The current share price implies upside of around 14% to the consensus price target in the FNArena database.
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