Fletcher takes a hammering

Fund managers say it's too soon to say if Fletcher can blame its downgrade on the Crane buy. Photo / APN

Fletcher Building's share price slumped to its lowest level in just over two years this week after the company said difficult trading conditions in its residential and commercial construction businesses would mean its earnings were likely to be 10 per cent lower in the current first half of its financial year, compared with the previous corresponding period last year.

Shares yesterday closed up 3c at $6.70.

Fund managers said it was too early to blame the earnings downgrade on Fletcher Building's acquisition of Australia's Crane, but that the jury was still out as to whether the purchase, completed early this year, was a good one or a bad one.

The company paid A$740 million ($948.6 million) for Crane - which makes and distributes plastic pipeline systems, plumbing and electrical supplies and non-ferrous products.

The March purchase coincided with a sharp downturn in Australian residential construction activity.

Fletcher Building said it was now looking at first-half earnings of about $150 million for the six months to December 31, down from $166 million in the same time last year.

That meant the company's result for the year to June 30 next year, which will include a full year of earnings from Crane, was expected to be similar to the $359 million "pre-unusual items" result for 2010/11.

The earnings downgrade sent the share price suddenly southward on Wednesday, the stock finishing at $6.92, down 98c, or 12.4 per cent, from its previous close. Fletcher Building's movement helped drag the share market's main barometer, the NZX-50 index, down 71.03 points (2.09 per cent) to 3325.12. Turnover in the stock was worth $54 million.

"It would appear that this warning is more due to across-the-board weakness in New Zealand, and more particularly in Australia, on top of difficult conditions in the steel division, rather than specifically due to Crane, but I suspect that going forward there will be a degree of focus on whether Crane can meet its acquisition expectations," Matt Goodson at BT Funds Management said.

The company, New Zealand's biggest in terms of market capitalisation, faces several issues, not the least of which is the fact that the start of rebuilding work in quake-stricken Christchurch will be further away than first thought. The 5.5 earthquake which hit last Sunday is likely to cause more delay.

Seismic issues aside, the company said conditions in New Zealand had remained challenging, with continued low levels of activity in the residential and commercial construction sectors. The group's businesses exposed to the residential and commercial markets in New Zealand recorded lower earnings but infrastructure activity remained steady.

In Australia, a significant fall in residential consents and continued weak approval levels in commercial construction had affected the earnings of businesses in those sectors.

Fletcher's Australian subsidiary, Laminex, had been hit by its high exposure to the residential sector.

Conditions in the steel industry remained difficult, with surplus capacity globally coupled with the high Australian dollar adversely affecting earnings from the export of long steel product into Australia. Its Formica unit continued to see earnings growth in each of its three regions - North America, Europe and Asia.

"In New Zealand, no material improvement in trading conditions is expected in the first half of the 2012 financial year, and the timing of a sustained and meaningful recovery beyond that is uncertain," the company said. In Australia - the source of about 45 per cent of the company's income - there was a clear risk that residential and commercial construction activity would stay about the current low level for the balance of the 2012 financial year.

Markets in North America and Europe were expected to remain flat while Asia was expected to continue to grow, the company said.