Analysts wary on forecasts for Fletcher

Jonathan Ling, CEO of Fletcher Building. Photo / Paul Estcourt

Analysts endorsed Fletcher Building's big annual profit released last week but some are a little cautious about its outlook.

Reports are now out from J.P. Morgan, Goldman Sachs, UBS and Forsyth Barr and they all provide an outlook through to 2013 including dividend guidance which some think will reach as much as 42 cents a share by then, up on the 29cps paid out for the June, 2010 year.

Of those four major financial houses, J.P. Morgan's analysts wrote the most bearish comments but projected the biggest annual dividend and profit figures.

Fletcher's mix of exposures made it "relatively unattractive", partly due to the depressed nature of New Zealand, Australia, American and European markets where it operates, J.P. Morgan said. Rating the stock neutral, J.P. Morgan said the net after-tax profit of $272 million for the June, 2010 year was "solid in testing times".

Management outlook was cautious and the $6.7 billion annual group revenue was "broadly in line with our expectations but was 4.3 per cent below the previous corresponding period. Higher revenues from the insulation and construction businesses were offset by lower revenues in most other businesses and adverse impacts from exchange rate movements," wrote J.P. Morgan's Australian-based analysis team Keith Chau, Alistair Reid and Anthony Passe-de Silva.

J.P. Morgan is the most bullish about longer-term dividend growth, projecting 2013's dividend will be 42cps.

Three out of four analysts' reports projected net after-tax profits north of $500 million by June, 2013 and only Forsyth Barr's Rob Mercer is under that target.

His projection is $473 million, although he has an "accumulate" investment recommendation on the stock, his analysis of the annual result is bullish and his charts show he envisages a 41cps dividend by June, 2013.

"The major risk facing Fletcher Building over the next year is the looming decline in non-residential construction activity in 2011 mainly because the next phase of large infrastructure projects is scheduled for 2012 and beyond. We see this as a temporary timing issue," Mercer wrote.

Fletcher is trading at a 22 per cent discount to Mercer's $9.40 valuation and offering good value, he said.

Jason Bloom of UBS said Fletcher's outlook statement was generally subdued although no earnings guidance for the June 2011 year was given at last Wednesday's annual result which he said was generally in line with expectations "and gives us some comfort that we are starting to see some leverage from the cost-out restructuring programmes and also from any improvement in volumes.

"In the short term, we believe Fletcher faces a few headwinds including weak commercial activity and some timing issues with large government infrastructure projects.

"However, on a medium to longer term view we remain comfortable with our buy thesis and continue to view Fletcher as one of the most positively leveraged stocks," Bloom wrote, able to take advantage of an improvement in general housing and building activity.

Matthew Henry of Goldman Sachs is projecting Fletcher's annual dividend will be 32cps this financial year, 35cps by 2012 and hit 40cps by June, 2013 although he says comments last week from chief executive Jonathan Ling touched on the patchy outlook for the current financial year.

New Zealand and Australian house building sectors were improving but commercial construction remained week. Fletcher is projecting a New Zealand infrastructure dip in the June, 2011 year, before a return to growth by 2012, Henry said.

November 17's annual meeting will provide guidance. Then, new chairman Ralph Waters will announce the target band of earnings expected at the Eden Park meeting in Auckland.

J.P. Morgan played up Fletcher's acquisition potential, saying it had a relatively strong balance sheet. Ling indicated Australasia remains a core focus for the business although Asia and other developing markets are targets, particularly for the laminates and panels business, J.P. Morgan's analysts said. Fletcher Building closed yesterday up 13c at $7.53.