The 2019 fire at the NZ International Convention Centre. Photo / Dean Purcell
The 2019 fire at the NZ International Convention Centre. Photo / Dean Purcell
New Zealand’s biggest listed construction materials manufacturer and distributor scored positive ratings ahead of its upcoming half-year result but cost rises on one big job might take a toll.
On Wednesday, February 15, Fletcher Building will announce its half-year result to December 31, 2022.
Analysts Rohan Koreman-Smit and Paul Korauaof Forsyth Barr have ranked the company favourably, saying construction cost overruns were behind the business which was lowly geared.
But they also flagged the extra $150 million that the NZ International Convention Centre needs to be finished on that major repair.
“While we expect near-term construction activity to decline, we are well placed this cycle. Legacy issues are largely behind it, margin targets are being met, capital allocation is focussed on organic growth and Fletcher has low debt level,” the analysts said in their January 30 report headlined ‘going cycling’.
They have a 12-month target price of $6.10 on the shares, trading at the end of January at $5.40, giving a market capitalisation of $4.2 billion.
“We acknowledge that the near-term outlook for residential construction activity is negative and Fletcher’s track record does not endear it to investors. Operationally, Fletcher is in the best shape it has been for a while,” the analysts said.
Grant Swanepoel of Jardens has also raised his forecast earnings, citing strong momentum and some evidence the company had been able to increase prices.
He expects a positive half-year update after slightly modified earnings changes. His 12-month target price has risen from $6.22 to $6.62 and he has a buy rating on the shares.
At its annual meeting on October 26, Fletcher confirmed a full-year June 30, 2023, EBIT target guidance of $855m-plus.
The company’s trading in the products and distribution division was in line with expectations. House sale volumes had been mixed: solid from July to August but soft in September, it said.
Forsyth Barr analysts expect net profit after tax for the 2023 year to $487m and gave a medium risk rating to the business.
Fletcher Building CEO Ross Taylor will announce the half-year result. Photo / Michael Craig
Interest rates appear to be close to their peak and net inward migration has rebounded faster than expected, they noted.
Capacity constraints have likely limited the reduction in New Zealand’s historic underbuild, particularly in Auckland.
Active Government and structural demographic tailwinds should underpin the annual build of around 60,000 dwellings, and the cost of new supply will likely moderate, they noted.
However, residential building consents were likely to fall 39 per cent to around 31,000 homes by 2025. Non-residential activity might decline 8 per cent in the next two years due to weaker office, industrial, and retail, partly offset by health, education and accommodation.
They also noticed falling house prices and factored those into their outlook.
“While stabilisation of the house prices may be required for a more meaningful rerate in Fletcher’s share price, peaking mortgage rates and rapidly improving migration will likely reduce negative sentiment over the next 12 months, hence, our positive view rating,” they said.
The number of homes available for sale is up 130 per cent from its lows but new listings appear to be slowing and to date there had been limited signs of distress. Mortgage lending is down around 40 per cent from its peaks. Sentiment in the residential construction sector has hit all-time lows.
Further losses have not been ruled out on the company’s biggest construction job: the NZ International Convention Centre.
On December 16, the company provided for another $150m on that job, on top of the $336m insurance payout that client SkyCity Entertainment Group has announced. The scope and methodology of the rebuild were now better understood so the cost of the remediation is now expected to exceed insurance coverage on the project, Fletcher announced.
“While management is confident completion costs are fully provided for, there is still two years to run and this is the fourth provision,” the Forbar analysts noted.
Fletcher said in December that three years on from the fire, the project team continued to make good progress.
“All demolition work is complete. Remediation of the steelwork is well advanced, roof installation has commenced and the first two car park levels are now completed and expected to be handed over to the client, SkyCity, later this month. Procurement is well-advanced and key program milestones are being met,” it said on December 16.
Fletcher continues to expect that the NZICC project will be completed in early 2025 or better.
But the extra costs will take a toll on next week’s announcement: “The additional provision on NZICC will be classified as a significant item in the company’s half-year 2023 financial statements. This expected treatment is based on NZICC being Fletcher Building’s last project in the now discontinued vertical building sector and not part of the group’s ongoing operations,” the company said on December 16.
Shares are trading around $5.44, down 16 per cent annually.
