Experts divided on Fletcher Building result: back on even keel or still under-delivering?

Fletcher chief executive Ross Taylor announced today's result. Photo/Greg Bowker

Fletcher Building received a mixed reaction after the construction company and building materials manufacturer and distributor converted last year's interim loss of $273 million into an interim profit of $89m.

Shane Solly of Harbour Asset Management said while there were signs the business was getting back on an even keel, there were still challenges to overcome.

Revenue of $4.7 billion for the December 31, 2018 half-year was "a little better" than expected, Solly said. The 8cps half-year dividend was "welcome but might disappoint some. The market is anticipating a larger full-year dividend".

Fletcher's Building + Interiors division remained a drag, Solly said, despite the last period's losses being turned into profits.

Grant Swanepoel of Craigs Investment Partners said the company's core business performance was slightly disappointing.

"Did EBIT meet guidance? Yes it did. Was that helpful in how the company has performed? No. The stuff they're selling had a slightly better performance than they were expecting. The stuff they're keeping is slightly less. Australia is not giving any comfort at all," Swanepoel said, referring to higher costs there.

Nor was he particularly impressed with the full-year guidance uplift. Fletcher forecast earnings for the full year to June 30, 2019 to be $650m to $700m, up on the guidance given at the November AGM of $630m to $680m.

But Swanepoel said the last guidance had a bottom-range "clearly below where the market expected it". And that $20m guidance uplift related solely to a change to depreciation on the company's Formica business, he said.

With Formica being held for sale, that asset is therefore not subject to depreciation in the second half of the financial year.

Dividend reinstatement with a half-year payout of 8cps on April 10 left him cold as well: "I could not care whether it's 5c or 20c. I am more interested in what they will do with the cash when it comes in," he said referring to Fletcher selling Formica for around US$840m.

Swanepoel said there was no indication from the company of whether it would keep a "light balance sheet" or spend the money from this sale and that remained of concern to him.

"But there are some positives," he said, referring to the distribution division where gross revenue was up 2 per cent from $797m to $809m. "And also just in terms of domestic activities, they seem to be more positive," he said, citing concrete operations and the construction business.

Institutional investor UBS said: "B+I (being shut down) and Formica (sold) did well while Australia was weak."

Soft Australian earnings would be a likely focus to investors because first-half EBIT from Australia was only $33m compared to UBS expectations of $49m.

by 4.30pm Fletcher shares had fallen 31c, or 5.87 per cent, to $4.97. The stock is down 20 per cent over the past 12 months.

Arie Dekker and Grant Lowe of First NZ Capital noted that the outlook was for flat New Zealand residential activity while Australian conditions remained in decline.

"In line with our expectations and Fletcher' guidance in November, Fletcher forecasts slower activity in the Australian residential sector and now the commercial sector, but with some support from robust activity levels in the infrastructure sector. Fletcher noted that New Zealand residential activity remains robust, but flat, with commercial and infrastructure stable. Increased input costs remain a factor," reaction from Dekker and Lowe said.

Divestment of international assets was on track for the full 2019 year, they said. Fletcher had completed the Roof Tile Group sale yielding $59m net and confirmed that Formica remained on scheduled to be sold in the June 2019 year, estimated to yield $1.1b net with six out of nine regulatory approvals received to date, their reaction said.

Net debt at $1.4b was up 16 per cent on the previous full-year, partly reflecting ongoing cash losses in the B+I division, they said.

Ross Taylor, Fletcher chief executive, said the business was making "good progress" on its strategy to refocus the business back to its core here and in Australia.

"We have completed the divestment of Roof Tile Group and signed an agreement to sell Formica for US$840m which we expect be complete by the end of the financial year," Taylor said.

"Our operating results across our core New Zealand businesses have been solid in the first half and we are on track to close out the B+I projects within the current provisions. In Australia, we have been impacted by the sharp decline in the residential market as well as higher input costs. We are focused on setting the Australian business up for improved performance from FY20 which will include a reset of the cost base," Taylor said in a statement.

Just on $54.9m is being withheld from Fletcher Construction for being late finishing two Auckland projects: the NZ International Convention centre between Hobson and Nelson St and the 39-level waterfront Commercial Bay between Quay St, Lower Albert St and Customs St.

Last week, SkyCity Entertainment Group said its $703m convention centre would not open until the second half of next year, despite having bookings for more than 7000 of delegates before that date, so it withheld $39.5m from Fletcher Construction. That centre was originally planned to open this month.

Yesterday, Precinct Properties announced it had withheld $15.4m from Fletcher Construction due to late delivery of its $1b Commercial Bay shopping/restaurant/office tower on the waterfront.

Fletcher has a market capitalisation of $4.5b, employs around 10,000 people and closed at $5.28 last night on the NZX. Today, it is trading around the same price.

FLETCHER BUILDING
Half years to December 31: 2018, 2017: profit (loss)
Revenue: $4.7b $4.8b
Operating earnings: $285m ($322m)
Net earnings: $89m ($273m)
Dividend declared: 8cps 0cps