Import changes could hit Fletcher

Andrew Rooney
Andrew Rooney
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 temporary measure.

''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.


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