Fletcher Building: New Zealand’s Residential Downturn a Double-Edged Sword

We maintain our fair value estimate of NZD 6.00 (AUD 5.50) per share for no-moat Fletcher Building FBU 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.

Trading at a 27% discount to our fair value estimate Fletcher shares screen as undervalued. We think the current share price is an overhang from the Western Australia Iplex pipes issue. We have already included a total cost of AUD 85 million pretax in our modeling, which is in a range between two potential scenarios of industry costs provided by management.

Statistics New Zealand reports that consents for single-dwelling homes were 36% lower in August 2023 than a year prior. For Fletcher, this means less demand for its building and construction materials, per management’s updated guidance. About 40% of earnings in these businesses is exposed to the residential segment. We don’t expect any change to volumes in the less cyclical segments of infrastructure and commercial.

Remarkably, Fletcher’s residential development business remains strong. The business develops detached houses, townhouses, and apartments in high-growth areas of Auckland and Christchurch. Volumes have remained robust since June 2023, with about 20 house sales per week. We think demand is due to Fletcher’s positioning as a lower-cost residential builder, making its homes more desirable when costs of borrowing are high.