Company Reports

Fletcher Building has appointed Nick Traber as acting CEO. Traber’s role is effective from March 29 until a permanent CEO is appointed. We think Traber looks well-placed for the position, having been CEO of the company’s concrete division since 2021. The concrete business is a strong-performing business, with EBITDA increasing by about 20% during Traber’s tenure as CEO over the past two financial years. Prior to this, Traber spent most of the past two decades in various positions with building materials company Holcim, including holding CEO roles in Europe and South America.

Fletcher Building operates across six segments: building products; distribution; concrete; Australia; residential and development and construction. Fletcher's earnings are tied to construction activity in Australia and New Zealand. In fiscal 2023, EBIT was approximately split: 25% building products; 17% residential and development; 16% distribution; 18% concrete; 21% Australia; and 3% construction.

We maintain our fair value estimate for no-moat Fletcher Building at NZD 6.00 per share. We modestly lift our fair value estimate for shares listed on the Australian Securities Exchange to AUD 5.70 based on the current New Zealand/Australia exchange rate. Fletcher reported first-half fiscal 2024 EBIT of NZD 264 million and downgraded full-year earnings guidance. Consequently, we cut our fiscal 2024 operating earnings forecast by one fifth to NZD 580 million, about the midpoint of management’s updated guidance. The operating environment will continue to be challenging over the remainder of the fiscal year with a contraction in new house builds and renovations weighing on volumes and margins. However, we expect a gradual recovery in the residential sector from fiscal 2025 and our mid- to long-term forecasts are largely unchanged.

We maintain our fair value estimate of NZD 6.00 (AUD 5.50) for no-moat Fletcher Building. The firm is expecting an additional NZD 180 million in pretax costs. This includes NZD 165 million to complete the New Zealand International Convention Centre, or NZICC, following a fire in 2019, and NZD 15 million to remediate quality issues at Wellington International Airport, or WIAL. We raise our pretax cash cost forecasts—for NZICC by NZD 165 million to NZD 440 and NZD 15 million for WIAL. The additional cash costs are modestly dilutive to our fair value, but this is offset by the time value of money.

We maintain our fair value estimate of NZD 6.00 (AUD 5.50) per share for no-moat Fletcher Building following its annual shareholders meeting and trading update. In the New Zealand materials and distributions business, Fletcher reported volumes from residential customers are expected to be about 5% softer over fiscal 2024 than prior guidance, due to slower demand for residential housing. Despite this, Fletcher’s own residential construction business is reporting strong year-to-date sales, reflecting its positioning as a lower-cost housing provider, enabling it to maintain demand through the downturn. We have lifted our fiscal 2025 volume estimates for the residential development business, offsetting a fiscal 2024 decline in volume in the materials and distribution business.

Fletcher Building operates across six segments: building products; distribution; concrete; Australia; residential and development and construction. Fletcher's earnings are tied to construction activity in Australia and New Zealand. In fiscal 2023, EBIT was approximately split: 25% building products; 17% residential and development; 16% distribution; 18% concrete; 21% Australia; and 3% construction.

We make no change to our fair value estimate of NZD 6.00 (AUD 5.50) for no-moat Fletcher Building. Since reporting in August 2023, we have included the total cost for Iplex of AUD 85 million pretax including the AUD 15 million already taken as a provision in fiscal 2023, which is in a range between two potential scenarios of industry costs provided by management. While our unchanged fair value estimate includes this lump sum we haven’t forecast the timing of it, with our unchanged earnings estimates excluding the expenses relating to Iplex.

We maintain our NZD 6.00 (AUD 5.50) per share fair value estimate for no-moat Fletcher Building and consider the stock undervalued. Underlying fiscal 2023 EBIT rose 6% to NZD 798 million, in line with our expectations. Although sales disappointed, coming in 6% below our forecast, the group EBIT margin of 9.4% was stronger than we had anticipated, a solid outcome given the cyclical challenges facing the New Zealand and Australia construction sectors.

We maintained our NZD 6 (AUD 5.70) per-share fair value estimate for no-moat Fletcher Building following the release of half-year results. While we maintained our fair value estimate, we’ve increased our fiscal 2022 and 2023 EBIT forecasts by 4% and 9%, respectively. We anticipate Fletcher will achieve its 10% EBIT margin target in fiscal 2023 with solid progress made toward this goal over the remainder of fiscal 2022. Our fiscal 2022 EBIT forecast is consistent with guidance of NZD 750 million and our fiscal 2023 EBIT forecast of NZD 871 million represents an EBIT margin of 10%.

We maintain our NZD 6.00 (AUD 5.70) per-share fair value estimate for Fletcher Building, following transition to a new analyst. We also maintain our high uncertainty, no economic moat and Standard capital allocation ratings. Shares in Fletcher screen at a 16% premium to our fair value estimate.

We lower our fiscal 2022 revenue and operating income forecasts for no-moat Fletcher Building by 4% and 13%, respectively, following Fletcher’s annual shareholder meeting which included a September quarter trading update. While no quantitative guidance was provided, Fletcher has been impacted by varying degrees of coronavirus restrictions across New Zealand and Australia during the September quarter. These restrictions have resulted in a temporary slowing of operations and consequent operating deleverage. Moreover, we surmise that capacity constraints currently persisting within the New Zealand building sector are delaying the conversion of housing consents to sales within Fletcher’s various building-exposed businesses.

Policymakers are increasingly cognizant of the significant contribution from the manufacturing processes, transport and disposal of building materials to the carbon-intensity of our built environment. Assessing the associated degree of carbon-risk associated with many building materials is a complex task—for detail, please see our special report “Combatting the Carbon Intensity of our Built Environment” dated July 27, 2021.

Fletcher Building’s diversified suite building materials businesses possess many strong brands and dominate key product categories in New Zealand, where it generates healthy returns on investment. At the group level, however, returns are below the cost of capital, as the firm has made poor acquisitions in adjacent segments and new geographies and suffered execution issues in the construction division. This has overwhelmed the positive impact of an unprecedented building cycle in Australia and New Zealand which peaked in 2018. Following the substantial losses sustained in its construction segment, Fletcher has taken corrective action--divesting its global Formica business and backing away from commercial construction projects which led to significant losses. But we’d like to have seen a more comprehensive restructure, involving a marked reduction in the group’s level of diversification. We’d advocate for Fletcher to re-focus the group’s attention on its businesses which are well positioned competitively. The potential for management to create value for shareholders is maximised when it's free from the distraction that comes with the ownership of a plethora of disparate businesses.

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.

The Australian Government’s targeted and highly effective fiscal support of the residential construction sector leads us to materially upgrade our near-term outlook for housing commencements and alteration and addition activity. Certainly, housing-related stocks under our coverage are set to benefit from the recovery in fiscal 2022, boosting earnings and improving balance sheet metrics. But with fiscal support for the sector now winding down, the valuation benefit of our upgraded near-term housing commencement forecasts to our housing-related coverage is modest at best.

Fletcher Building’s diversified suite building materials businesses possess many strong brands and dominate key product categories in New Zealand, where it generates healthy returns on investment. At the group level, however, returns are below the cost of capital, as the firm has made poor acquisitions in adjacent segments and new geographies and suffered execution issues in the construction division. This has overwhelmed the positive impact of an unprecedented building cycle in Australia and New Zealand which peaked in 2018. Following the substantial losses sustained in its construction segment, Fletcher has taken corrective action—divesting its global Formica business and backing away from commercial construction projects which led to significant losses. But we’d like to have seen a more comprehensive restructure, involving a marked reduction in the group’s level of diversification. We’d advocate for Fletcher to re-focus the group’s attention on its businesses which are well positioned competitively. The potential for management to create value for shareholders is maximised when it's free from the distraction that comes with the ownership of a plethora of disparate businesses.

While we’d anticipated Fletcher would benefit from an inevitable recovery in the New Zealand, or NZ, housing market, the rebound has arrived sooner than we’d previously anticipated. With the cyclical earnings recovery within Fletcher’s NZ building products, distribution, concrete and construction businesses--which contribute a cumulative 80% of group EBIT excluding corporate overheads--in the first half of fiscal 2021 tracking materially ahead of our full-year expectations, we increase our fiscal 2021 EBIT estimate by a sizeable 25% to NZD 614 million. Our upwardly revised fiscal 2021 EBIT estimate sits near the lower end of Fletcher’s full-year fiscal 2021 EBIT guidance range of NZD 610 million to NZD 660 million.

Fletcher Building’s diversified suite building materials businesses possess many strong brands and dominate key product categories in New Zealand, where it generates healthy returns on investment. At the group level, however, returns are below the cost of capital, as the firm has made poor acquisitions in adjacent segments and new geographies and suffered execution issues in the construction division. This has overwhelmed the positive impact of an unprecedented building cycle in Australia and New Zealand which peaked in 2018. Following the substantial losses sustained in its construction segment, Fletcher has taken corrective action—divesting its global Formica business and backing away from commercial construction projects which led to significant losses. But we’d like to have seen a more comprehensive restructure, involving a marked reduction in the group’s level of diversification. We’d advocate for Fletcher to re-focus the group’s attention on its businesses which are well positioned competitively. The potential for management to create value for shareholders is maximised when it's free from the distraction that comes with the ownership of a plethora of disparate businesses.

The impact of the coronavirus on Australian residential construction activity, house prices, and rental markets in 2020 has proven far less pronounced than we'd originally feared. Dwelling construction activity, house prices, and rents contracted during the height of the pandemic's shock to the Australian economy in mid-2020. However, a rapid reversal is now apparent in the final quarter of 2020, largely the result of highly effective fiscal stimulus directed toward the housing sector. Consequently, much-needed cyclical earnings relief is afoot for the building and construction materials sector. However, equity markets have already spotted the impending inflection point in construction activity and investor optimism abounds once more. With housing-exposed stock prices already incorporating the sector's imminent earnings recovery, we recommend investors look elsewhere in their search for value as the sector is likely to underperform in 2021. For further detail regarding our 2021 outlook on Australian housing, please see our report “Imminent Recovery Is Overbuilt Into Housing Exposed Stock Prices” dated Dec. 10, 2020.

Fletcher Building’s diversified suite building materials businesses possess many strong brands and dominate key product categories in New Zealand, where it generates healthy returns on investment. At the group level, however, returns are below the cost of capital, as the firm has made poor acquisitions in adjacent segments and new geographies and suffered execution issues in the construction division. This has overwhelmed the positive impact of an unprecedented building cycle in Australia and New Zealand which peaked in 2018. Following the substantial losses sustained in its construction segment, Fletcher has taken corrective action—divesting its global Formica business and backing away from commercial construction projects which led to significant losses. But we’d like to have seen a more comprehensive restructure, involving a marked reduction in the group’s level of diversification. We’d advocate for Fletcher to re-focus the group’s attention on its businesses which are well positioned competitively. The potential for management to create value for shareholders is maximised when it's free from the distraction that comes with the ownership of a plethora of disparate businesses.