Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search


$100M+ upside for Fletcher earnings

Asset sales, focus on costs could yield $100M+ upside for Fletcher earnings: FNZC

By Pattrick Smellie

Oct. 9 (BusinessDesk) - Fletcher Building has as much as $100 million untapped upside in its operating earnings if it can return to the performance it produced in its core businesses before the 2008 financial crisis over the next three to four years, says analysis by broking firm First NZ Capital.

However, a combination of focus on its New Zealand manufacturing and distribution businesses and divestment of non-core or underperforming international assets could unlock significant additional value, FNZC analyst Kar Yue Yeo said in a note to clients.

“Our high-level analysis suggests it might be possible for FBU (Fletcher) to achieve a $900 million-plus stretched ebit (earnings before interest and tax) target (25 percent higher than the $720 million FY18 forecast consensus estimate) by retaining its existing portfolio over a three-to-four-year horizon.

“However, this is a high-input, higher-risk and potentially low-reward outcome. FBU’s current portfolio of businesses is too wide in spectrum to be well-managed. The company’s performance in the past 10 years is indicative of this.”

The note comes ahead of an earnings outlook update, scheduled for Oct. 25, and as the Fletcher board seeks a replacement for chief executive Mark Adamson, who departed under a cloud in July after announcing two substantial earnings downgrades in one year and the leak of a colourfully worded internal email criticising executives in Fletcher’s building and interiors division.

The company reported a 23 percent fall in ebit at $526 million in the year to June 30, in part because of difficulties experienced on two very large New Zealand construction projects, thought to be the Christchurch justice precinct and the Auckland international convention centre.

Even without improved performance, FNZC forecasts that Fletcher’s position will have improved to ebit of $783 million by the 2019/20 financial year.

However, FNZC sees the new chief executive, which the company says could be appointed “in the next month or so” although there is no formal deadline, as having the opportunity to “redefine the playbook, financial targets and priorities for the team”.

“Asset sale or a narrowing of FBU’s existing portfolio in itself is not a panacea to FBU’s financial performance, but it would certainly free up bandwidth to allow a stronger focus on core operations where management can add most value.”

FNZC doesn’t nominate specific assets for divestment, but analysis of its Australian and ‘rest of world’ portfolio leaves little doubt that it regards the Formica business as lacking strategic alignment, while some of the Australian units will require significant work to return to acceptable returns on funds employed.

“While Formica Group could offer ebit upside from further business improvement, it is inherently not an exposure to the building material sector, and does not add to the strength of FBU’s building material business,” FNZC says.

The note also appears to favour focus on Fletcher’s manufacturing and distribution businesses over its construction and residential land development opportunities.

“FBU Construction provides some pull-through volume for FBU but its ownership is not essential to the success of the group’s New Zealand manufacturing and distribution businesses,” FNZC says.

Internal initiatives to improve performance and the recovery of the New Zealand construction market over the last five years have “led to positive operating leverage, margin recovery and ROFE in the last five years”.

“However, FBU NZ current ebit, profitability and return on funds employed … are still significantly short of the last peak in FY08A (the 2008 financial year) when industry volume was in fact at lower levels.

“We estimate this gap at $100 million per annum”, reflecting weaker pricing power.

“While FBU NZ may have ceded some share in certain categories in the supply and distribution of building materials over the last 10 years, we doubt this loss would be significant (if any) based on our understanding of FBU’s share trend in plasterboard, insulation, cement, ready mix, concrete products, aggregates, steel distribution and building supplies distribution.

“In effect, FBU’s NZ Manufacturing and Distribution business ebit margin over this period appears to have been eroded by higher cost inflation compared with product price inflation.

“There is still significant upside potential … if the new CEO is able to drive further cost efficiency that commensurate with new realities of lower product pricing power environment in recent times.”

Fletcher Building shares were trading this morning 0.8 percent higher than on Friday, at $7.81 and have lost 27 percent of their value in the year to date.

FNZC is rating the stock 'outperform' with a target price of $9.20.


© Scoop Media

Business Headlines | Sci-Tech Headlines


Federated Farmers: NAIT Levy Increases Must Achieve Accurate, User-friendly System
Nobody welcomes extra costs but if OSPRI is to catch-up on under investment in the NAIT platform and deliver on its workability and farmer support, levy increases are probably necessary, Federated Farmers says... More>>

Westpac: More Job Opportunities, But Growth In Workers’ Earnings Remains Subdued

The Westpac McDermott Miller Employment Confidence Index rose 1.2 points in the December quarter, to a level of 106.9. This was the sixth straight rise in the index since the Covid-19 lockdown in 2020. Michael Gordon, Acting Chief Economist for Westpac, noted that the rise in the index has largely been driven by perceptions... More>>

Statistics: Card Spending Continues To Increase As COVID-19 Restrictions Ease

The busy Christmas period combined with easing COVID-19 restrictions helped to increase card spending in December 2021, Stats NZ said today... More>>

TradeMe: Job Market Ends 2021 On A High With Record Number Of Vacancies
The New Zealand job market finished 2021 on a high note, with the ball still firmly in the job hunters’ court, according to the analysis of 69,600 vacancies listed on Trade Me Jobs for the quarter ending 31 December (Q4)... More>>

Insurance Council of New Zealand: September South Island Windstorm Cost $36.5 M Raises 2021 Extreme Weather Claims Total To $321.6 M

Gale force winds and storms between 9 and 13 September 2021 resulted in insurers supporting communities to the tune of $36.5 m. This is a significant rise, of $16.7 m, on preliminary figures for the event and lifts the end of year total for all extreme weather events in 2021 to $321.6 m... More>>

Statistics: Building Consents Hit New Highs In November
There were a record 48,522 new homes consented in the year ended November 2021, Stats NZ said today. This was up 26 percent compared with the year ended November 2020... More>>