Experts pick low result for Fletcher

Fletcher Building is faced with soft building activity in Australia and tough domestic conditions. Photo / Paul Estcourt

Sharemarket heavyweight Fletcher Building - faced with soft building activity in Australia and tough domestic conditions - will reach only the lower end of its financial targets when it reports its June full-year result this week, say analysts.

Fletcher's management has previously indicated the company will make $310 million to $340 million of underlying net profit, but Forsyth Barr's Rob Mercer and Credit Suisse's Kar Yue Yeo have issued pessimistic previews ahead of Wednesday's announcement.

Forsyth Barr is forecasting underlying net profit of $320 million - a drop of 11 per cent compared with the previous year.

Mercer said suppressed levels of activity, as reflected in 20 consecutive months of decline in residential consent data, highlighted a challenging environment in the Australian building sector.

However, a stimulatory backdrop and continued population growth should help in at least a modest recovery through the current financial year in that market, he said.

"We expect the infrastructure sector will remain strong."

Domestic conditions for Fletcher were tough but improving, Mercer said, citing the rebuilding in Christchurch and stronger Auckland new dwellings data.

"This should support a better second half with further improvement into 2013."

Increasing pricing competition in steel and subdued volumes were pressuring margins and Mercer questioned Fletcher's longer-term participation and commitment to this sector, in light of the negative outlook.

Restructuring-related costs of $40 millon to $50 million were expected from Laminex, flagged for the second half in addition to the $21 million incurred in the first half, Mercersaid.

"Further restructuring provisioning is likely in the Australian and New Zealand insulation businesses which have been subject to a strategic review."

Ongoing weakness in New Zealand and a slowdown in Australia had negatively affected the company's near-term earnings, Mercer said.

Delays in the timing for the rebuilding of Christchurch had also been an issue, he said.

"We expect building activity in New Zealand to begin a strong and sustainable recovery in [the] full-year 2013, which should lead to a substantial uplift in earnings over the next few years."

Credit Suisse's Yeo said he was expecting pre-abnormal net profit to come in near the low end of Fletcher's $310 million to $340 million guidance range and that provisions, restructuring changes and asset writedowns were projected to lower the reported net profit to $262 million.

Yeo was expecting limited earnings guidance but a high level of commentary on the outlook for key markets in Australasia, Europe, North America and Asia.

Fletcher's share price closed up 8c on Friday at $6.55, compared with 52-week high and low points of $8 and $5.69 respectively.

Yeo said: "With Australia's past year's decline in building approvals beginning to level off and New Zealand building recovery gaining momentum, we continue to recommend the stock on a 12-month basis."