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Fletcher Building is forecasting a strong uplift in underlying earnings for 2017 in the range of $720-760 million, mainly on the back of a boom in Auckland residential construction.

Fletcher broke with its usual practice when reporting results to provide guidance for 2017 which was in line with market expectations, Sydney-based RBC Capital Markets analyst Andrew Scott says.

He says Fletcher’s 2016 net profit rising to $462 million from $270 million the previous year, a 71% gain was a strong result. Total revenue rose 4% to $9 billion.

The result included one-time gains of $44 million relating to the sale of the Rocla Quarry Products business offset by a write-off in its Formica India manufacturing assets and charges for plant closures.

“We view this as a strong result, albeit partially assisted by asset sale gains,” Mr Scott says.

“Fletcher remains well positioned to benefit from the strength in the New Zealand and Australian construction markets and we agree with management’s view the New Zealand market strength may have more time to run than Australia’s.”

Fletcher chief executive Mark Adamson says New Zealand residential consents are expected to peak in 2018, though the post-earthquake surge in activity in Christchurch has now reversed. There could be a lag which means peak activity occurs after 2018 while non-residential activity is forecast to remain steady at elevated levels, Mr Adamson says.

In Australia residential activity is expected to gradually decline after building consents peaked in December and little growth is forecast in non-residential activity. Moderate growth is expected in the rest of the world, he says.

The diversified company has completed restructuring the business, selling-off unwanted assets and is now turning to what it dubs the “Accelerate” programme: essentially getting more out of what it has and completing the turnaround of under-performing businesses such as Iplex and Tradelink in Australia and Formica Europe.

It also involves beefing up external procurement to take more advantage of Fletcher’s scale and introducing manufacturing efficiencies.

Since Mr Adamson took over as chief executive four years ago he has replaced 50% of his senior leadership team (about 250 staff), something he says was necessary to boost performance as the company had “lost it way.”

Previous chief executives were keen to diversify earnings out of New Zealand through offshore acquisitions but Mr Adamson says he prefers driving more growth in the assets it already has, given 80% of mergers and acquisitions destroy shareholder value. The company recently paid $303 million for Manawatu-based roading and maintenance company Higgins.

“Higgins was a particular hole we needed to fill and we inherited great assets,” he says. “We’re now trying to grow organically because the best shareholder return is not spending a dollar, but getting a dollar out of the one already spent.”

Via NBR. Read the full article here.