Analysts greeted Fletcher Building's interim result as a somewhat flat experience when net profit after tax dropped 8 per cent from $89 million to $82m but they are hoping for better news in the second half of the financial year.
After Fletcher reported its financials to the NZX, Grant Swanepoel of Deutsche Bank wrote: "This was a soft as expected result. With the second-half outlook, combined with improving drivers in Australia and New Zealand, this is likely the trough earnings point."
Fletcher blamed the revenue drop on legacy construction projects finishing and Australian residential and infrastructure markets declining.
Earnings before interest and tax (ebit) fell from $272m to $219m and earnings before interest, tax, depreciation and amortisation (ebitda) from $519m to $402m, he noted, although New Zealand core earnings were good, except steel.
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Fletcher suffered in Australia with a soft first half, but that was better than expected, he noted adding that benefits should flow more fully in the second half.
Swanepoel noted that the full-year outlook was unchanged with ebit in the $515m-$565m range.
Arie Dekker of Jarden said first-half ebit was below his firm's expectations and "leaves plenty to do in the second half to achieve unchanged full-year guidance". Jarden was expecting ebit of $240m yet Fletcher only delivered $219m, he noted. It was also expecting net profit after tax of $118m so the $82m delivered was 31 per cent below what had been anticipated.
And a 12cps dividend was anticipated, so 11cps was also below what was hoped for.
"While investors will take some relief from Fletcher's reconfirmation of full-year 2020 guidance, it is hard to ignore reasonably soft outcomes across almost all of [the] businesses in the first half and the need for quite a marked improvement in the performance of steel in particular in the second half," he said.
Dekker also noted the reaffirmation of ebit in the $515m-$565m range but said earnings would be weighted to the second half "owing to the Australian cost-out programme benefit, residential settlements and improved steel performance flowing through".
Shane Solly, an institutional investor with Harbour Asset Management, said Fletcher's outlook hinged on two factors: "Forward guidance is dependent on a recovery in the steel business and Australian building materials, with both sectors in transition."
Francis Sweetman of Milford Asset Management said the market was expecting a weak result after AGM commentary that Australian earnings would be weighted to the second half.
"In fact, given some of the negative news on construction activity in Australia in the past few months such as the Boral downgrade, the reiteration of the existing earnings guidance range for the full year is positive," she said.
Fletcher announced its intention to sell its Rocla business, a leading Australian supplier of concrete to the building and construction industry. Fletcher bought Rocla in 2005. Sweetman said the market would not be disappointed about that "given ongoing performance issues".
The heat was now on to do better in the final half, she said: "They have to deliver a very strong second half and earn an extra $100m to achieve the mid-point of that earnings guidance, which will be a very big challenge."
Fletcher chief executive Ross Taylor said the results were "in line with our expectations and those set out at our annual shareholders' meeting in November 2019. Our business is now stabilised and focused, providing the foundation to drive consistent performance and growth into the future."
Net debt spiralled, from $325m in FY19 to $766m in HY20 "from share buyback and legacy construction projects". But Fletcher said it still had undrawn credit of $925m and cash on hand of $570m.
Revenue from New Zealand operations was steady but construction revenues fell "as legacy project complete" and Australian revenue was down due to residential and infrastructure market declines.
Construction division gross revenue fell from $866m in the previous half-year to $744m in the latest period. But Fletcher indicated a strong order book, declaring a revenue backlog of $1.4b, up on the previous $1.1b. No changes were made to provisions on those legacy projects which include the $1b Commercial Bay for Precinct Properties and SkyCity Entertainment Group's $703m NZ International Convention Centre.
On the house-building front, Fletcher is targeting 800 to 900 new housing sales for the full year, compared to 755 last year. The first houses have been built from the Clever Core pre-fab manufacturing site which the business opened last year.
But revenue from the residential and development fell, from $251m to $224m. Ebitda was also down from $44m to $36m.
Gross revenue in the distribution division, which includes PlaceMakers, rose from $809m to $824m but building products fell from $672m to $645m.
Before the result, analysts said the company would give an update on the impact of the NZICC fire after accounting for insurance and adjustments to timelines.
Fletcher shares are trading around $5.18, down on the $5.65 of January 30.