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21/11/2018 — General
Fletcher’s angst now in Australia
By Simon Hartley

Fletcher Building Ltd (NZX & ASX: FBU) has downgraded its full-year earnings before interest and tax (ebit) by 10%, or by about $20 million, according to analysts.

Fletcher shares plunged 7.4%, or 41 cents, to $5.14 following the announcement.

The downgrade is not linked to the poor performance of its Building + Interiors (B+I) division, whose $660 M loss-provision for the current financial year remains unchanged, but to “challenging” Australian trading conditions and timing of house sales in its Residential Division in New Zealand.

Analysts have labelled the Australian “turnaround” as having “stalled,” with potentially more pain to come.

At its annual shareholders meeting in Auckland yesterday, Fletcher said that subject to cashflows and trading conditions, it would resume dividends payments in full year 2019.

In the past two financial years, Fletcher has had to book a total $952 M in losses associated with its B+I division, after being caught out badly on 16 mainly fixed-price contracts, including the Auckland international conference centre and the justice precinct build in Christchurch.

Ebit for the year was expected to be $684 M, but that was downgraded to a range of $630 M to $680 M.

Craigs Investment Partners broker Peter McIntyre said aside from softening Australian trading conditions and house sales, there was also the impact of a four week mill shutdown at Golden Bay Cement to be accounted for; costing in a range of $8 M to $11 M.

“The normalised guidance downgrade is around $20 M. The 10% lower ebit was a reflection of Australian trading conditions, the Golden Bay Cement issue and timing of sales in its New Zealand residential business,” he said.

McIntyre said most of the ebit downgrade was attributable to the tougher Australian environment. He noted that Fletcher's expected turnaround, with Australia as a “preferred growth platform” had stalled.

Forsyth Barr broker Damian Foster said the Australian downturn was only the beginning, and “more pain was likely to come.” While the weakness of Fletcher's Australian businesses, in the face of softening demand did not surprise, the timing did.

In a research note earlier this month, Foster said it was highlighted the Fletcher's Australian division was comprised high operating leverage businesses which were sensitive to changes in price, demand or cost.

“It is, however, very early in the Australian downturn, and Fletcher's Australian portfolio includes a number of fixture and fittings businesses with later (building) cycle products,” he said.

It was difficult to see how these businesses would not continue to be materially impacted as the downturn advances in Australia. The NZ and Australian residential markets are about 43% of Fletcher's total revenue.

In his address to shareholders, chief executive Ross Taylor said in NZ residential consents were run at around 30,000 a year, slightly down on previous years but otherwise as expected.

“Activity levels remain robust, especially here in Auckland, but we think this is now plateauing and there are signs that the Auckland market will pull back slightly,” he said.

Given continuing supply/demand imbalances, a solid New Zealand economy, and immigration levels not being overly curtailed, Taylor said present activity levels in NZ were “sustainable, at least for the medium term.”

In Fletcher's other New Zealand markets, infrastructure and commercial construction activity remained “solid.”

In Australia, residential activity accounted for about 40% of market exposure.

“Here we have seen a sharp contraction in new residential consents in the most recent quarter,” Taylor said.

Hardest hit was the apartment or multifamily portion of the market. This is currently impacting the Australian businesses and “feels like a medium term trend that has some distance to run yet.”

He said Fletcher's turnaround plans for the Australian business, were now factoring in a weaker Australian residential market than previously assumed.

“In contrast to this the strength of the infrastructure project pipeline on the Eastern Seaboard continues to look strong for the medium term and provides some offset to what we are seeing in the residential sector,” Taylor added.

*Simon Hartley is senior business reporter and assistant chief reporter for the Otago Daily Times.

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