Fletcher back in black but analysts split
Fletcher Building received a mixed reaction from analysts after the construction company converted last year’s interim loss of $273 million into an interim profit of $89m.
Shane Solly of Harbour Asset Management was satisfied with the result but Grant Swanepoel of Craigs Investment Partners took a dimmer view.
Solly said: “This is the strategy the team has been working on for a while and a sign of the business getting back on an even keel.”
Revenue of $4.7 billion for the December 31, 2018 half-year was “a little better” than expected, Solly said. The 8cps half-year dividend was “welcome but might disappoint some. The market is anticipating a larger fullyear dividend”.
Fletcher’s Building + Interiors division remained a drag, Solly said, despite the last period’s losses being turned into profits.
Swanepoel described the company’s core business performance as slightly disappointing.
“Did ebit meet guidance? Yes it did. Was that helpful in how the company has performed? No. The stuff they’re selling had a slightly better performance than they were expecting. The stuff they’re keeping is slightly less. Australia is not giving any comfort at all,” Swanepoel said, referring to higher costs there.
Nor was he impressed with the fullyear guidance uplift. Fletcher forecast earnings for the full year to June 30, 2019 to be $650m to $700m, up on the guidance given at the November AGM of $630m to $680m.
But Swanepoel said the last guidance had a bottom-range “clearly below where the market expected it”. And that $20m guidance uplift related solely to a change to depreciation on the company’s Formica business, he said.
With Formica being held for sale, that asset was not subject to depreciation in the second half of the financial year.
Dividend reinstatement with a half-year payout of 8cps on April 10 left him cold as well. “I could not care whether it’s 5c or 20c. I am more interested in what they will do with the cash when it comes in,” Swanepoel said referring to the Formica sale.
He said there was no indication from the company if it would keep a “light balance sheet” or spend the money from this sale and that remained of concern to him.
“But there are some positives,” he said, referring to the distribution division where gross revenue was up 2 per cent from $797m to $809m. “And also just in terms of domestic activities, they seem to be more positive,” he said, citing concrete operations and the construction business.
Arie Dekker and Grant Lowe of First NZ Capital noted the outlook was for flat New Zealand residential activity while Australian conditions remained in decline.
“In line with our expectations and Fletcher’ guidance in November, Fletcher forecasts slower activity in the Australian residential sector and now the commercial sector, but with some support from robust activity levels in the infrastructure sector.
Fletcher noted that New Zealand residential activity remains robust with commercial and infrastructure stable. Increased input costs remain a factor,” Dekker and Lowe said.
Divestment of international assets was on track for the full 2019 year, they said.
Net debt at $1.4b was up 16 per cent on the previous full year, partly reflecting ongoing cash losses in the B+I division, they said.
Ross Taylor, Fletcher chief executive, said the business was making “good progress” on its strategy to refocus the business back to its core here and in Australia.
“We have completed the divestment of Roof Tile Group and signed an agreement to sell Formica for US$840m which we expect be complete by the end of the financial year,” Taylor said in a statement.
“Our operating results across our core New Zealand businesses have been solid in the first half and we are on track to close out the B+I projects within the current provisions.
“In Australia, we have been impacted by the sharp decline in the residential market as well as higher input costs.
“We are focused on setting the Australian business up for improved performance from FY20 which will include a reset of the cost base.”