Goodson doubted a break-up of the company, as touted by some, would be the answer.
“They have a range of manufacturing businesses of all sorts of products with strong market positions, which generally deliver pretty good returns, on average, throughout the cycle.
“In the construction division, their execution has been appalling but ultimately it makes strategic sense if it actually performed better.
“There is some logic to the current structure, but that logic does not apply so much to their Australian businesses.
“They have obviously taken a decent writedown [on Tradelink] and have put that business up for sale in Australia.
“What Fletcher Building needs are really hard-nosed, competent operations, and it is going to be a tough year or two, given the cycle, but that is at least partly encapsulated in the share price,” he said.
Concrete decline
Official data certainly reflects tough times in construction.
In the December 2023 quarter, the actual volume of ready-mixed concrete (RMC) produced was 1.03 million cubic metres, down 12 per cent compared with the December 2022 quarter, Stats NZ said.
The trend has been in decline for the last two years, highlighting the pressure that building and construction are under.
Forsyth Barr said RMC production is a leading indicator for the construction sector.
“Concrete is typically poured at the start of a build and as such can provide an early indicator of lower demand for later-stage products, such as plasterboard and insulation,” the broker said in a note.
“Including cement and aggregates RMC production is also significant to Fletcher Building, and volumes have proven to be a useful guide to Fletcher Building’s New Zealand revenue growth in the past.”
Banking squeeze
Results from Commonwealth Bank of Australia and its New Zealand subsidiary ASB this week show the banks are starting to feel margin pressure again after a period of strong margin expansion.
CBA’s net interest margin was 1.99 per cent - slightly worse than analysts were expecting. ASB’s net interest margin - a key measure of profitability - fell by 26 basis points to 2.21 per cent (a rate below the 30-year industry average of 2.34 per cent).
Jarden chief economist Carlos Cacho said the key drag on margins for CBA as a whole was deposit costs driven by a combination of switching and pricing.
“The one positive was the moderation in lending margin compression (to -2bps from -7bps in 2H23 and -13bps in 1H23), suggesting that CBA’s margin over volumes strategy is working.
“Our tracking of deposit rate shows an increase in deposit costs in the December quarter, consistent with the margin deterioration, but recent data suggests this should moderate.”
But he expects the bank’s margin to keep “grinding lower”.
Robbie Urquhart, senior portfolio manager of Australian equities at Fisher Funds, said ASB had delivered a tepid result in what had been a volatile interest rate but economically benign environment.
“Cash profits were down 12 per cent on the six months to December 2022, partly for ‘good reasons’. ASB’s investment spend on things like technology improvements and cyber and fraud protection was up and added to their cost base. This is spend that customers should like. Staff costs were higher too. Bad debt impairments on the other hand were actually low, which is a positive.”
Jarden has an underweight rating on CBA and a target price of A$99. It last traded at A$114.07.
Mercury rises on print deal
It will be interesting to see Mercury Capital’s next move with the Australasian private equity firm recently selling out of New Zealand printing specialist Blue Star Group.
The mid-market buyout firm headed by Clark Perkins is known for its canny acquisitions and quiet exits resulting in high multiple returns.
The 2021 sale of a stake in Kiwi office products supplier NXP, which housed Staples’ NZ operations, was a case in point with the AFR reporting Mercury exiting at 10 times its investment - made in tandem with Tom Sturgess’ Tiri Group.
Last month, Mercury’s MCF 1 fund sold out of Blue Star, which was also a joint investment with Tiri Group made back in 2013.
Mercury sold its 50 per cent stake to Peninsula Packaging, established in December by Sky TV co-founder Craig Heatley, who was already a significant shareholder in Blue Star indirectly through his shareholding in MCF 1 Fund. Meanwhile, Sturgess retains his shareholding in Blue Star.
It’s the type of deal that Mercury specialises in, buying into distressed assets with a rapid turn-around strategy.
The firm has four separate funds with about A$2 billion in committed capital.
Its New Zealand investments include Are Media, which owns brands such as the Australian Women’s Weekly, Woman’s Day, New Idea and the New Zealand Listener.
Mercury also has an 89 per cent stake in Tamaki Health, the largest primary care operator in New Zealand with 950 employees and contractors, including around 350 doctors.
- Additional reporting by Tamsyn Parker and Duncan Bridgeman.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
