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Fletcher Building has lost more than half its value in the past year, and fears are growing that the former sharemarket star could be taken over.
Giant Australian-headquartered firm Boral is being tipped as a possible predator for the Penrose-headquartered materials distributor and manufacturer, whose shares yesterday slipped
beneath the $6 level.
The stock fell 54 per cent from $13.01 on July 25 last year to $5.98 during trading yesterday. It recovered slightly to close at $6.04.
Forsyth Barr research head Rob Mercer said the company would be attractive to the right buyer. He predicted that might well be Boral because that business lacked exposure to New Zealand and there were few overlaps between Boral and Fletcher Building in Australia. Forsyth Barr values Fletcher shares at $11.95.
Boral is Australia's largest building and construction materials supplier, with A$5 billion ($6.32 billion) in annual sales and operations in the United States and Asia.
Jonathan Ling, Fletcher's chief executive, declined to discuss any takeover speculation, saying he was in a "blackout period". The company's June 30 balance date prevented him from discussing any financials, he said. But he was resigned about the share price.
"The market is the market. Other building material stocks in this part of the world and internationally are suffering at the moment."
On May 20, Fletcher directors said that without significant economic change, the annual result would meet the consensus of analysts' forecasts for net earnings of $450 million to $460 million.
They have said nothing since.
Blair Cooper, of Citigroup in Wellington, has released a pessimistic analysis predicting Fletcher's profit would drop from last year's $484 million to $457 million this year and $330 million next year - before recovering to reach $381 million by 2010.
On August 13, Ling will announce the June-year result. It is likely to suffer somewhat from the tough global economic conditions.
Fletcher's $1 billion investment in the US Formica Corporation, combined with the declining Australasian housing market, is expected to scar it, in contrast to its performance this decade when the business went on a global buying spree.
Fletcher's November 12 annual meeting at Auckland's Langham Hotel might be far less congratulatory than the enthusiastic rallies of the past few years, when more than 500 shareholders have given the board long, loud applause.
Fletcher's market capitalisation has plummeted, from $6.6 billion in May last year to $4.6 billion in February, and just over $3 billion now.
Not everyone is taking a dim view. Macquarie Group has increased its Fletcher Building stake, almost doubling it to 9.45 per cent a few months ago, just below the 10 per cent needed to block any rival takeover bid.
However, executives involved in this transaction said yesterday Macquarie had since reduced that holding and now held much less than 9.45 per cent.
Cooper's report cited a combination of problems for Fletcher, including a much deeper trough in New Zealand residential building activity than previously thought, a less favourable Australian residential outlook and further cuts to Citigroup's Formica forecasts.
"Consequently, our target price falls to $8.50 from $10.10," he wrote, releasing a new worst-case analysis which predicted that earnings would continue to fall. He downgraded Formica's forecasts, saying US volumes might stay depressed for three years. Formica management expected only steady, small growth in Asia, and Formica's European operations would experience a small decline, he said.
However, he still priced Fletcher Building higher than the market.
"We believe that even at this level and in current market conditions, a share price of more than $7 can be justified," he wrote.
He downgraded Fletcher Building's 2008 earnings forecast by 18 per cent and its 2010 earnings forecast by 20 per cent.
Cooper analysed the threat posed by expansionist retailer Bunnings to Fletcher's Placemakers business and noted Bunnings planned to grow its footprint here from 16 to 22 stores. Yet Placemakers had performed surprisingly well to date, despite the residential slowdown, Cooper wrote.
Management believed Placemakers had benefited from leaky building repairs, but Cooper said he expected the chain to be one of the hardest hit by the residential slowdown.
Fletcher management had suggested the company would wind back new house construction.
National house-building data showed a 20 per cent fall in activity in the May quarter, and seasonally adjusted consents data indicates only about 19,500 houses will be built this year.
Cooper predicted 17,500 houses would be built nationally next year, with only a mild recovery in 2010 when 18,500 are expected to be built.
