Fletcher Building gets about 41% of its $8.8bn of revenue from New Zealand and 47% from Australia with EBIT contributions roughly the same. Residential building consents are a key driver of earnings for Fletcher’s and consents in New Zealand and the US are improving but Australian consents continue to slow. The company notes that consents were up +14% in New Zealand for the June 2012 year, up +9% in the US but down by -12% in Australia for the same period. NZ housing consents are gaining momentum and may well surprise on the upside looking forward. A recent survey of leading New Zealand builders showed that most (ie over 80%) had experienced improved sales over the last 6 months. No doubt the Canterbury re-build will be a significant contributor to overall activity with over 20,000 home repairs carried out by Fletchers to date and a target to have over 100,000 repairs completed by the end of 2015. Following the demolition of 70-80% of the Christchurch CBD and the finalisation of the new development plan, Fletchers will be 1 of 5 contractors in the alliance to repair the Christchurch infrastructure.
Improved building consents plus the Christchurch rebuild has seen investor sentiment towards the company improve with the shareprice up by around 20% since late August to well over $7 now, despite slowing activity in Australia. The key advantage for Fletcher’s is that it has a range of leading businesses by market share across Building Products, Concrete, Construction, Crane (in Australia), Distribution (Placemakers), Laminates/Panels and Steel – ie a diversified and decentralised business model with geographic spread. Fletcher’s sits as the largest listed company on the NZX with a capitalisation of about $5b and is ranked #59 on the ASX and interestingly less than half (ie 48%) of the shareholders are domiciled in New Zealand, with some 22% domiciled in Australia. With undrawn credit lines of around $800m and cash on hand of nearly $200m the company is well placed for an upswing in activity. If shareprices generally discount future events then investors (particularly Australian judging by recent buying activity), are beginning to realise that there may be much improved certainty around Fletchers earnings forecasts for the coming year and beyond.”
Disclosure of Interest: Milford Asset Management holds Fletcher Building shares on behalf of its clients.