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Fletcher Building raised to ‘hold’ at Morningstar

Fletcher Building raised to ‘hold’ at Morningstar on residential outlook

By Jonathan Underhill

Oct. 22 – Fletcher Building Ltd., New Zealand’s biggest construction company, may bolster profits in 2011 on a pick-up in residential construction and the benefits of cost cutting, according to Morningstar.

The research firm raised its rating on the stock to ‘hold’ from ‘reduce’ following the company’s analyst presentations and site tour last week. Morningstar reiterated its forecast for 2010 net profit of $306.5 million and raised its 2011 estimate to $385 million from $347 million.

“We anticipate a pick-up in residential construction in New Zealand and Australia in the second half” which will begin to lift earnings in the final six months of 2010, said Morningstar analyst Nachi Moghe. “Cost savings are likely to surprise on the upside , giving FBU the ability to achieve peak earnings with 10-15% lower volumes than would otherwise have been the case.”

Fletcher posted its first loss since 2001 in the 12 months ended June 30, reflecting weaker earnings in all businesses except steel. It took one-time charges of $360 million to write down its Formica unit, close plants and downsize.

Shares of the company fell 0.7% to $8.34 today and have been stand-out performers this year, surging 47%.Morningstar lifted its fair value for the shares to $8 from $7.50.

According to its report, Fletcher’s infrastructure unit, which accounts for 36% of EBIT, is expecting an 18% decline in cement volumes in 2010, with the high kiwi dollar making imports more attractive and potentially limiting the company’s ability to raise prices.

While the infrastructure unit’s construction backlog is strong, much of this is government contracts which typically yield a slimmer margin.

Building products chief executive Chris Ellis said volumes of plasterboard are tracking “well below” year-earlier levels though prices are stable. Insulation volumes are running at twice the typical level of underlying demand of 55,000 tons on the back of the Australian government’s stimulus measures. Building products accounts for 20% of EBIT,

Distribution, which includes 62 PlaceMaker stores in New Zealand, has volumes that are “tracking along the bottom because of a depressed residential market” though unit CEO John Beveridge said a pick-up in housing starts gives cause for optimism, according to the Morningstar report.

Steel volumes are down 20% from peak levels and earnings are set to decline from last year’s strong levels, when global prices were high.

Laminex demand in New Zealand is expected to remain soft though demand in Australia may nudge higher with the residential property market. Fletcher aims to slash costs by between $40 million and $50 million over the next two years across Laminex and Formica, which may help underpin earnings.

Formica has strong market share in most markets and tries to steer clear of price wars by aiming at the premium end, Morningstar said.


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