Anne Gibson

Property editor of the NZ Herald

$75m cost cut tipped for Fletcher

Risk is ensuring any cost savings are retained and not eroded by tough competition, says analyst.

Fletcher Building chief executive Mark Adamson said in November that he wanted to shake up the culture, not the headcount. Photo / Steven McNicholl
Fletcher Building chief executive Mark Adamson said in November that he wanted to shake up the culture, not the headcount. Photo / Steven McNicholl

Fletcher Building chief executive Mark Adamson could slice costs by $75 million, as the construction giant tries to pare back spending to bolster its bottom line.

Emily Behncke and John Hynd, Deutsche Bank Markets Research analysts, expect Adamson to deliver big cost savings by 2015, creating centres of excellence, reducing distribution and logistics expenditure and developing shared services among various subsidiaries of the business.

Fletcher's half-year result to December 31 is out on Wednesday and Behncke and Hynd expect it to make $352 million net profit in the 2013 June year, up on last year's $317 million.

They forecast $146.6 million net profit after tax for the December 2012 half-year and rate Fletcher's stock as "buy".

Adamson said in November he wanted to shake up the culture, not the headcount. People would not be reading articles about 10,000 or 1000 people going, but there would be efficiency improvements which were not "small beer ...

we're talking tens of millions of dollars saved".

Behncke and Hynd said Fletcher's Tradelink, Laminex and Distribution businesses showed potential for cost cuts of $50 million to $100 million, equating to 0.5 to 1 per cent of sales for the full 2013 year.

"Accordingly, we factor in $20 million of cost savings [by] 2013, $50 million [by] 2014 and $75 million [by] 2015," they said.

Goldman Sachs analyst Matt Henry also forecast significant cost reductions but said the risk was to ensure cost savings were retained and not eroded by tough competition.

So far, the only division named as having a cost focus was Laminex where costs have been reduced by a plant closure, labour cuts and distribution savings, he said.

Morningstar analyst Nathan Zaia said Adamson had now settled in and efficiency remained a priority but acquisitions to diversify the revenue base were back on the table.

"We think the aim to grow earnings regardless of the economic cycle is ambitious and unattainable," Zaia said. "Fletcher will always be at the mercy of volatile construction activity. But it is imperative the operation is always run as efficiently as possible."

He is forecasting $304.1 million adjusted net profit after tax for the June 2013 year, rising to $373.9 million then $420.1 million by 2015.

Based on big share price gains lately, Henry downgraded the stock to neutral, saying its recent big increase was based on rising expectations.

Fletcher hit a new high in the past two years of $9.52 on January 31 and is still trading around $9.03, well up on last July's $5.90. Henry said the shares had responded strongly to increased market confidence in the company's earnings growth outlook and people saw it as less risky.

Six key themes emerged for 2013, he said - a strong construction recovery in New Zealand, stabilisation of the Australian residential building scene, benefits to Fletcher's Formica business from the United States' economic recovery, a strong pipeline of work for Fletcher Construction , the prospect of significant cost reductions and the effective of strong pressures on margins from Fletcher competitors.

- NZ Herald

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