Fletcher Building’s Growth Skews To Second Half

This story features FLETCHER BUILDING LIMITED. For more info SHARE ANALYSIS: FBU

-Overall demand needs to improve
-Oz businesses doing it tough
-Attractive entry point for Credit Suisse
 

By Eva Brocklehurst

Fletcher Building ((FBU))  has placed great emphasis on its second half earnings. At its AGM the company has guided to FY15 earnings of NZ$650-690m but expects all growth to be in the second half. This forecast suggests to JP Morgan that at both the mid point and top end of the range, the second half earnings could well present a record, well above the last top of NZ$371m in 2008.

At the top end of this guidance, the lift against FY14 would be over 18%. While always expecting a second half skew, JP Morgan notes there is even greater emphasis on this now, despite the drag emanating from asset sales as well as the roll-off of Stonefields an EQR. New Zealand's August building consents rose 15.7% and reveal activity remains strong in that quarter but in Australia, Iplex and Stramit are battling weak demand and competitive pressures.

JP Morgan believes the situation will need to improve in order to hit management's targets. Morgan Stanley agrees. The broker estimates Australian earnings may be down by 15% in the first half, so 15% growth is then required in the second half to hit forecasts. Iplex and Stramit are drivers of the weakness and the broker remains cautious regarding the ability to improve these businesses by the second half. Morgan Stanley is also concerned about NZ's housing market outlook beyond FY15.

The company's earnings are both late cycle and infrastructure related which to Deutsche Bank means an Australian recovery will likely be more pronounced from FY16. With the company expecting a flat first half Deutsche Bank's revised forecasts imply 13% second half earnings growth. This can be achieved by cost cutting and some recovery to Australian earnings, in the broker's calculations. Outside of Australasia the company remarked that US housing growth has slowed, with no significant signs of a commercial uptick, while Europe's outlook is mostly centred on a modest improvement in the UK. South East Asian markets continue to grow but China and Taiwan are expected to be flat.

In Australia, Macquarie notes CSG-related earnings for Iplex last year were material and a second half FY14 pause in work from this area has probably influenced the company's guidance. The outlook for Rocla is also likely influenced by relatively weak rail and road work over FY15. In the case of Stramit, the brand is facing weak non-residential and engineering volumes.

The company's chairman remarked that Australia, which makes up 40% of the asset base, has been a valuable contributor to growth but is now experiencing what New Zealand did in 2008 and doing it tough. Macquarie makes the point on the back of these remarks that Fletcher Building has been a reasonably reliable forecaster of earnings over the past two years. The broker suspects the market will be somewhat worried about the split in guidance and commentary on Australia. Meanwhile, New Zealand may be the stand-out performer but is starting to face capacity constraints. Macquarie retains a NZ$8.16 target and Underperform rating.

The guidance was softer than CIMB expected, reflecting the challenges in Australia mainly stemming from declining mining investment and relatively low levels of budgeted government expenditure on road and rail. The broker still believes the company offers multiple years of growth on relatively attractive metrics, highlighting the NZ businesses which appear to be benefiting from broad based cyclical improvement as well as the rebuilding of Christchurch. CIMB has downgraded its target to NZ$9.72 from NZ$10.51 but retains an Add rating.

Management has indicated it is adopting an active portfolio strategy for its businesses, signalling to Credit Suisse further divestment of non-core assets may be on the table. Credit Suisse finds that the recent rotation by investors out of cyclical stocks into "defensive" companies, and the weakness since the results in August, presents an attractive entry point for Fletcher Building. The risk reward is envisaged positively, with the company providing a diversified exposure to the ongoing recovery in the NZ building market and a pick up in detached home building in Australia, as well as projected recovery in the US non-residential sector in 2015. The broker, in a similar vein to CIMB, expects further earnings recovery for Fletcher Building in the next three years and this reflects in the Outperform rating with a NZ$10.80 target.

FNArena's database contains four Buy, one Hold and three Sell ratings. Dividend yield on FY15 and FY16 earnings forecasts is 4.5% and 5.0% respectively.
 

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