Detours on Fletcher’s Path Toward a More Profitable Future Looking Less Likely; Raising FVE 8%

No-moat Fletcher outlined the solid progress it continues to make against its medium-term strategy to materially enhance the profitability of the New Zealand, or NZ, building materials conglomerate at its 2021 investor day. While Fletcher’s medium-term financial targets remain largely unchanged, good progress has been made toward the turnaround of the Australia segment. Accordingly, we upgrade our group EBIT margin forecasts, which we now anticipate will reach 8.6% by fiscal 2025--up from a prior forecast of 8.0% and a forecast fiscal 2021 EBIT margin of 8.1%. In turn, our upgraded EBIT margin expectations drive an 8% increase to our fair value estimate to NZD 5.75 per share (AUD 5.35 per share). However, with cost-out initiatives now largely implemented, Fletcher’s medium-term EBIT margin target of 10% continues to look ambitious. On this basis, shares in Fletcher screen expensively and trade at a 30% premium relative to our revised fair value estimate.