The Government's axing in the Budget of duties on
imported building materials could put Fletcher Building's
bottom-line under pressure from increased offshore competition.
Fletcher, which is the lead contractor in the up to $40
billion Canterbury rebuild, has a more than 90% share of the
domestic plasterboard market, which generates high profit
margins for the company.
Effective from July 1, the Government has suspended
anti-dumping duties on plasterboard, wire nails and
reinforcing steel bars for three years. It estimates a
combined $3500 saving when building a standard house.
Forsyth Barr broker Andrew Rooney said the recent entry of
German product Knauf, which was awarded a Government
procurement contract, the strong New Zealand dollar and now
the removal of anti-dumping duties would put downward
pressure on plasterboard product prices.
''We estimate Fletcher's [brand] Winstone Wallboards business
generate high margins, contributing 8%-10% of group
earnings,'' Mr Rooney said.
While any short-term impact was likely to be ''muted'', given
the strength of the GIB brand and need for independent
appraisal of new, imported imports, Mr Rooney said Fletcher's
''competitive dynamics'' could be negatively impacted by
imports in the future.
Craigs Investment Partners broker Peter McIntyre said duties
and tariffs applied to most of the materials used to build a
standard house, and it was important to remember this was a
''However, in the short term this appears to be a negative
for Fletcher,'' he said.
While Fletcher last week retained its full-year 2014 earnings
before interests and tax guidance at $610 million to $650
million, Craigs had downgraded full-year forecasts by 15%,
due to a slower Canterbury rebuild and a slower-than-expected
recovery in Fletcher's Australian businesses, represented
respectively as 87% of the downgrade and 13%.
In an recent update on Fletcher's outlook, released before
the Budget, Mr Rooney said Fletcher's had an ''enviable
pipeline'' of increasing work activity in New Zealand, but
does face a more challenging environment in Australia. Mr
Rooney it would get positive leverage from the ''significant
upcycle'' in New Zealand construction activity in all three
industry sectors, residential, commercial and infrastructure,
in coming years.
''Fletcher Building is facing an enviable pipeline of
industry activity in New Zealand. The domestic [NZ] pipeline
offers significant earnings growth through to an activity
peak in full-year 2017,'' he said.
However, Mr Rooney added a cautionary note, that work in
Australia remained ''challenging'', as was the rising
interest rate backdrop in New Zealand and stalling progress
in some Christchurch anchor projects. These factors could
''dampen some of the enthusiasm''.
Mr McIntyre said because of changes to currency forecasts,
after-tax profit estimates for Fletcher covering 2014 and
2015 were slightly downgraded by -0.4% and -1.1%, to $366.5
million and $487.3 million respectively.
While Forsyth Barr held its 2014 after-tax profit at $355
million, its 2015 forecast changed by 2.3%, down from $433
million to $423 million.
Mr Rooney said Fletcher had lost some share of the domestic
building and construction industry during the past decade.
''This reflects increasing competition, a shift in industry
mix towards infrastructure and more recently, some business
divestments,'' he said.
Mr Rooney said while inflationary pressure was typically good
news for the construction sector, in the present cycle he
expected inflation to be more measured, given the higher
levels of competition, centralised procurement for public
sector projects and also increased labour mobility.
Forsyth Barr slightly increased its target price to $9.35,
and kept its rating at ''underperform'', while Craigs now has
a ''hold'' recommendation.