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Nuplex cut to ‘hold’ at Craigs on Australia downturn

Nuplex cut to ‘hold’ at Craigs on steeper-than-expected Australian manufacturing downturn

By Suze Metherell

March 26 (BusinessDesk) – Nuplex Industries was winded by a steeper-than-expected cyclical downturn in Australia’s manufacturing sector, says Craigs Investment Partners, which cut the specialty chemicals manufacturer to ‘hold’ from ‘buy’ following its first-half results.

The market in Australia and New Zealand has undergone “a structural change” since 2010, as Nuplex’s high margin customers, in packaging adhesives, textiles and inks, reduce production in response to a manufacturing that’s trimming local output in favour of importing finished goods, Craigs analyst Dennis Lee said in a report.

He said there was a risk of “further escalation in restructuring costs if more drastic changes are necessary to contain Australia and New Zealand earnings leakage.”

“The cyclical downturn particularly in Australia was steeper than expected and this has accelerated the speed of structural reform in the manufacturing sector,” Lee said in the note titled “First-half 2014 post-result review – Australia still a drag”.

First-half earnings for the Auckland-based company showed sales from its main resins business in Australia fell 20 percent. Sales in Australia have been further crimped by the 18 percent gain in the kiwi dollar against the Australian currency over the past 12 months

The Australian Industry Group's Performance of Manufacturing Index, a private gauge of activity in the sector, contracted for a fourth month in February. The industry group called for increased competitiveness and productivity if the economy was to “find new sources of growth as the boom in mining investment wanes”.

The Australian PMI index stood at 48.6 last month, on a scale where a reading below 50 signals contraction. The same New Zealand measure, the BNZ-BusinessNZ PMI stood at 56.2 for February, and has been expanding for 18 consecutive months.

Last month Fletcher Building, New Zealand’s largest listed company, described Australian conditions as soft. It reported a 27 percent decline in its first-half Australian earnings, which account for half the company’s business. A 1 percent gain in sales in Australian dollar terms translated to a 10 percent decline to $1.7 billion, once converted back to the kiwi dollar.

The Auckland-based building company said the outlook for Australian commercial construction remained subdued, with low state government spending on infrastructure, while the mining activity looked “depressed”.

Nuplex shares were unchanged at $3.60. They are rated ‘hold’ by four out of six analysts surveyed by Reuters, with an average target price of $3.65. Fletcher shares, which are also rated ‘hold,’ fell 1.4 percent to $9.48, according to Reuters, with an average target price of $9.42.

(BusinessDesk)

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