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Home / Business / Companies / Construction

Fletcher dragged down by US slump

Anne Gibson
By Anne Gibson
Property Editor·NZ Herald·
20 May, 2008 05:00 PM3 mins to read

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KEY POINTS:

Yesterday's profit guidance from Fletcher Building sparked a share price plunge and prompted analysts to take a closer look at forecasts - with one saying the company's pre-tax and interest earnings could take a $97 million hit.

Stephen Hudson of Macquarie Research Equities in Auckland yesterday issued a
report saying Fletcher's earnings before interest and tax could fall from an expected $794 million for the June year to $697 million, a drop of 12 per cent.

Fletcher's full-year result will not be out until August 13 but nervousness emerged after the company issued a statement about its earnings which flagged issues surrounding the severe downturn in the United States.

Fletcher shares yesterday closed down 25c at $8.25, down from an annual high of $13.42. They hit a session low of $8.01 - matching the stock's 52-week low.

Hudson and other analysts expressed concern about the US business Formica which Fletcher bought last year.

He wrote: "We think the market is likely to deduct off the abnormal gains but is unlikely to add back the restructuring costs at Formica,"

Fletcher had an earnings boost from its steel business but without that, would be marking down expectations for the core New Zealand business, he said.

The results update from Fletcher chief executive Jonathan Ling and chief financial officer Bill Roest said Formica's initial results were disappointing and the US was tougher than expected last year when the company bought Formica. Fletcher was still on target to meet expectations but the composition of its annual profit would be different.

The board still expected Fletcher's annual earnings to meet the consensus of analysts' forecasts of $450 million-$460 million, they said.

But Formica's earnings would be reduced because of the "severe downturn" in the US, adversely affecting results by around $21 million after tax combined with restructuring and operating costs from the consolidation of Formica's North American operations. "The group, with the exception of Formica's US operations, has performed satisfactorily," Ling and Roest said. Ebit would be in the $750 million-$760 million range.

Rob Mercer, analyst at Forsyth Barr, downgraded his forecasts due to weakness from Formica's US operations and a 10 per cent decline in New Zealand house building.

But in his report titled "Earnings downgraded but don't ignore the positives", Mercer ranked Fletcher as a stock to buy, praising its Australian business and a potential $2 billion backlog of construction work.

Last August, Fletcher disclosed a $1.5 billion building backlog but Mercer said given the large number of electricity sector projects, its order book was likely to be even busier now.

"Whenever the market becomes anxious about the New Zealand economic outlook, Fletcher is quickly boxed as having substantial downside earnings risk," Mercer wrote.

Goldman Sachs JBWere analyst Matthew Henry revised the New Zealand's construction sector outlook, writing in a report headlined "Residential tough but not all doom and gloom" that fundamentals were weak and a sharp downturn was under way although the pipeline of infrastructure work remained strong.

"We remain concerned about downside risk to Fletcher earnings.

"Global building materials companies, including Fletcher, benefited from significant margin expansion through the cheap credit-fuelled construction boom from 2001-2007.

"These margins may now revert as demand declines and competition escalates," Henry wrote, adding that he expected negative news from here, the US, Britain and Spain to weigh on Fletcher through the balance of this year.

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