Fletcher Building paints a rosy picture

Work under way on the corner of Montreal and Salisbury Sts in Christchurch in January, for retail...
Work under way on the corner of Montreal and Salisbury Sts in Christchurch in January, for retail, hospitality and office space. Photo by The Star.
Canterbury rebuild lead contractor Fletcher Building has a record $1.82 billion work backlog but analysts see the rebuild throwing up a few more issues.

Fletcher paints a picture of a positive year ahead, and forecasts increasing last year's $592 million earnings before interest and tax (Ebit), but there remain underlying concerns over the strength and effect of the New Zealand dollar, the impetus of Canterbury's rebuild and freeing up of government cash.

Canterbury's overall $40 billion rebuild was slow to gain traction; compounded by insurance issues, subsequent flooding claims, labour and housing shortages and the signing off of major commercial and infrastructure projects.

The issues prompted a domino effect on expected revenue for Fletcher, the main contractors, subcontractors and suppliers.

On the passing of the fourth anniversary of the first earthquake (September 2010), the expected peak from construction earnings has again been pushed out, to the end of 2015.

Following on from posting its full-year result in August, Fletcher's managing director Mark Adamson last week released an annual review of operations.

He is expecting ''strong activity levels'' in New Zealand to continue, and an improvement in business for its divisions exposed to the Australian residential sector.

''Commercial construction activity is expected to improve modestly, while engineering activity is likely to remain subdued and government expenditure on construction and engineering will continue to be impacted by fiscal constraints,'' Mr Adamson's report said.

The North American housing market was improving, but commercial activity was expected to remain relatively flat, while Europe is forecast ''stable overall'', with some UK improvement.

Mr Adamson said Fletcher's strategy remained centred on improved operational leverage and targeted growth opportunities in the core New Zealand and Australian markets.

Craigs Investment Partners broker Peter McIntyre said there were three ''key areas'' for improvement: attaining better Australian profit margins, harnessing gains from its FBUnite restructuring programme, and positioning for New Zealand housing.

Mr Adamson said cash flow was down from $559 million the year before to $489 million, in part due to increased investment in Auckland residential land, plus commitments in coming years in order ''to capture future growth''.

Mr McIntyre said with New Zealand operations having contributed 58% of Ebit last year, Australia was a ''key'' to 2015 Ebit growth, with Fletcher expecting ''roughly equal'' contributions of around 45% from each country's operations.

He said the 13% rise in work backlog to $1.82 billion was ''an all-time high''.

Fletcher's debt had declined during the previous financial year from $1.78 billion to $1.64 billion; with undrawn credit lines of $616 million and cash in hand of $134 million.

Mr McIntyre said Fletcher had worked hard to improve its debt/equity position.

''They have strong credit lines and good cash reserves.

''They seem very adamant large acquisitions are off the table, which will please investors.

''We'd expect further improvement in their debt position, leading to higher dividend returns to investors over the longer term,'' Mr McIntyre said.

Last year's full-year dividend was up 6%, to 34c. Mr Adamson said Fletcher had established a target dividend payout ratio in a range of 50% to 75% of net earnings, to provide flexibility for dividends to be maintained, despite variations in economic conditions.

Mr McIntyre said Fletcher appeared to be in a more ''conservative mode of thinking'' and quite content in taking advantage of transtasman and local opportunities in New Zealand.

Forsyth Barr broker Andrew Rooney said Fletcher appeared confident of growing Australian Ebit, having said it would grow each half year, which implied Ebit of at least $190 million for the full year.

''The [Fletcher] group is becoming more efficient and more productive, even in Australia, where profits declined for the year as a whole, given a weak first half during 2014,'' he said.

Mr Rooney estimated full year 2015 would see organic revenue growth rise 6% and Ebit up around 13%.

''Our more modest earnings outlook, particularly for full-year 2016 estimates, reflects a number of factors,'' he said.

They included shallower-than-expected residential New Zealand work, with the sector already at peak expectations, and possible bottlenecks in land availability, housing demand and labour capacity.

He noted Fletcher had won only two major Christchurch contracts, and while that reflected the slowing nature of the rebuild as opposed to Fletcher losing a lot of tenders, it would still impact on Fletcher's performance in Christchurch.

''Over the course of full-year 2015 estimates and full-year 2016 estimates, Fletcher's profits from the rebuild-related activity is now likely to decline,'' Mr Rooney said.

During 2014, Fletcher's restructuring programme FBUnite created savings of around $25 million, but that was partly offset by $10 million in increased operating costs and $12 million capital expenditure.

Mr McIntyre said, ''Yes, there is a lot of cost initially [in FBUnite] and it will take a long time, but they will be driving out those savings for the long term.''

During 2015, Fletcher expects ''incremental benefits'' of $25 million to be generated by FBUnite; and by 2018 to achieve deliver total benefits estimated at $100 million, but Mr Rooney believed the extent of expected annual savings would not be made, pushing out the overall benefit of FBUnite further.


Year ahead outlook

New Zealand: Strong activity level expected to continue in residential, commercial and infrastructure. Continued Canterbury work on infrastructure repairs and new commercial activity. Home repair programme substantially complete by December.

Australia: Improved outlook for residential and commercial construction, but continued subdued activity in mining and infrastructure sectors.

North America: Modest improvement in residential, but commercial sector flat.

Europe: Stable market conditions overall with UK growth expected.

Asia: Slower China growth; Thailand's instability tempering performance.

Source: Fletcher Building

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