Local strength set to buoy Fletcher result

Rising New Zealand commercial and house-building is good for Fletcher Building. Photo / Natalie Slade

Rising New Zealand commercial and house-building could buoy this week's Fletcher Building result as analysts highlighted domestic activity as a big profit driver.

But all were bearish about the Australian performance, indicating lower expectations.

The biggest company listed on the NZX with a market capitalisation of $5.8 billion and operations in plasterboard, steel, panel products, laminates, concrete and building will announce its December 2014 half-year result on Wednesday.

Andy Bowley and James Bascand, Wellington-based Forsyth Barr analysts, forecast $161 million net profit after tax for the first half of the financial year, up 4.7 per cent on the previous year.

They contrasted expectations from New Zealand and Australia.

"Fletcher Building is due to report another polarising result. Further advances in New Zealand given improving activity levels will be offset by apparent struggles in several key Australian businesses," they said.

"We forecast ebit (earnings before interest and tax) of $285 million, up 1 per cent against the prior year, which implies [there will be] a significantly stronger second half. Fletcher will be reporting its new divisional structure, including light building products and heavy building products, for the first time."

The key issues were the outlook for Australian heavy building products businesses and Stramit, the rate of underlying New Zealand activity uplift and growth drivers for an anticipated significantly stronger second half, they said. Sydney-based UBS analysts David Leitch and Andrew Moller said the strong local building cycle had been Fletcher investors' friend.

"By value, the six-month moving total of non residential consents is up 29 per cent year on year and for residential up 18 per cent. These are very good numbers and supported by concrete production up at least 15 per cent," they said.

Even after allowing for lower profits from Auckland housing estate Stonefields at Mt Wellington, the New Zealand business would show good momentum, they predicted. Fletcher's four big Australian businesses are Laminex, Rocla, Stramit and Tradelink and the analysts said these all had some potential for earnings surprise.

They questioned extensive management changes announced last year at Laminex, Iplex and in other areas, saying it hinted at some problems that need solving.

"We have never been convinced that Fletcher's disparate portfolio of businesses in Australia form a unified whole with common goals or natural synergies," they said.

"As such we think that over time a more focused and easily understood portfolio will emerge. Rocla, Stramit, Laminex and Tradelink are unrelated businesses. They have different manufacturing technologies, different end markets and different distribution channels."

Credit Suisse research analysts Kar Yue Yeo in Wellington and Andrew Peros in Sydney said the recovery in the New Zealand building market, a projected recovery in the United States non-residential sector and cost savings from chief executive Mark Adamson's FBUnite programme were all positives for Fletcher.

They also expected the domestic construction sector to improve further.

New Zealand led building activity indicators suggested further strengthening of approval levels and for higher work to be put in place in 2015, they said.

This was driven by a combination of residential and non-residential work in Auckland and Christchurch and generally assisted by strong net positive migration to New Zealand.

Fletcher Building shares closed up 28c on Friday at $8.75.