Fletcher Building pile-drives doubters

Fletcher Building revealed a stunning annual result yesterday, but still the market sold its shares, leaving chief executive Ralph Waters a tad grumpy.

Operating earnings rose 30 per cent to $596 million in the June year, bettering the company's own forecast of between $560 million and $580 million despite three guidance upgrades during the year.

The bottom-line net profit rose 38 per cent to $330 million.

Fletcher Building shares were sold down 22c shortly after the report, although they later recovered to end square at $7.18.

"What do you have to do?" Waters asked.

Some market analysts said Fletcher shares, like other stocks that have rallied strongly, were close to fully priced and unless there was upward guidance a further move up was difficult.

But Forsyth Barr research head Rob Mercer predicted any earnings changes from a residential building slowdown would be cushioned by demand for large infrastructure. He valued the stock at $7.81.

"Fletcher Building's share price will gain another leg of momentum once the market has greater confidence and can quantify the residential downturn risk," he said. That would become more apparent within the next three months, but the company would continue to deliver an excellent performance in the year ahead.

"We need to move on and realise these levels of earnings can be sustained in the next two to three years," said Mercer, who believed the company had been wrongly valued based on its performance in past economic cycles.

Waters was unwilling to comply with calls for a fresh forecast.

"We said, like we have for the last few years, that we expect to have another satisfactory year," he said, although the company was expecting more subdued trading because of softening economies in New Zealand and in Australia.

Waters said the company had succeeded in reducing dependence on the New Zealand residential market with more than 35 per cent of revenue now coming from Australia.

"These changes, along with the internal improvements, should stand the group in good stead during the current year."

But he said: "Others may be feeling pressure, or be seduced, into trying to predict how much they are going to earn in the next 12 months. We haven't ever done it, and we are not going to start."

Fletcher Building only gave guidance when market expectations differed from the company's. He said the company had been forced into making forecasts because "everyone was tarring us with the downgrade brushes that everyone else was making".

Amro Craigs broker Matt Willis said the infrastructure and non-residential side of the business were "clearly very resilient" from an earnings viewpoint.

"Their order book has never been bigger," he said. Fletcher Construction has an order book of almost $900 million.

The final dividend was lifted to 17c from 14c, raising the total to a fully imputed 32c from 25c. A share-price rise, combined with the dividend, meant investors had a total shareholder return of 61 per cent for the year, he said.

All divisions of the company lifted earnings.