KEY POINTS:
The weakening economy has prompted another financial analyst to downgrade Fletcher Building's outlook.
Rob Mercer of Forsyth Barr Research says the company's profit might drop from $484 million last year to $451.9 million this year and $404.4 million next year.
A deteriorating outlook for New Zealand house building
and disappointing earnings from Formica in the United States has placed pressure on Fletcher's earnings, Mercer said.
But he defended his $11.82 valuation on Fletcher shares which are only trading at $6.50, saying that the low price is unrealistic and overly pessimistic.
His report comes after Fletcher was last week tipped as a possible takeover target because of its share price falling from $14 to $5.98.
Australia's Boral was tipped as the predator, sparking a partial recovery in the stock.
Blair Cooper of Citigroup in Wellington has already released a pessimistic analysis, predicting Fletcher's profit would drop from $484 million to $457 million this year and $330 million next year before recovering to reach $381 million by 2010.
Mercer found Fletcher was offering good value but said his earnings downgrade was partly because of the fortunes of the domestic house building market, heading for a sharper correction than expected and possibly dropping 15 per cent in the next year.
Signs were also emerging that Australia's housing market would perform worse than anticipated in the next year too, Mercer said, predicting a 15 per cent decline in activity at Fletcher's retail chain PlaceMakers and manufacturer Winstone Wallboards.
"FBU [Fletcher Building] only owns 50 per cent of PlaceMakers so even if PlaceMakers' ebit halved from its current level of $75 million, FBU's exposure would only be 50 per cent of the fall," Mercer wrote.
Fletcher was responding to more challenging times by reducing its capital expenditure budgets. "The catchphrase at FBU is "cash is king" with a view to generating positive free cash flow for debt reduction in the order of $150 million," Mercer wrote.
Fletcher's profits from its investments in Queenstown's Jacks Point luxury residential project and the Lunn Ave housing estate in Auckland would be lower next year, Mercer said.
He also downgraded the forecast of Firth, Fletcher's giant ready-mix operations, saying many small regional competitors would become more aggressive in their pricing.
Laminex's Australian operations were at risk of giving lower earnings, Mercer said, citing a softer outlook for house building there and the gas crisis in Western Australia.
But Fletcher's large infrastructure division should cushion the company's earnings in the next few years, he predicted, listing big jobs like Eden Park, $7 billion planned by Transpower on projects in the next three years, the Government's plans for hospitals, Mt Eden prison and schools as well as water infrastructure projects and Transit's motorway plans.
"The pipeline of projects is substantial and is unlikely to be impacted by the slowdown in the housing cycle," Mercer wrote.
He is taking a positive view on earnings from Fletcher's Pacific Steel, EasySteel, Pacific Coilcoaters and Diamond in New Zealand and its Stramit in Australia.
Fletcher shares closed up 4c at $6.55 yesterday.
COMING UP
Fletcher Building
Annual result: August 13
AGM: November 12.
