KEY POINTS:
The house that Fletcher built has a few bits missing.
In the past five years, it has grown into New Zealand's second-largest company, after Telecom, with a market worth of $4.3 billion. But it has wider ambitions for expansion into Europe, Asia and North America, and wants to
break into the Australian Stock Exchange Top 100 list.
With the ability to borrow $1.5 billion for acquisitions, a share price above $10 and coffers swelled by strong cashflow, Fletcher has a good chance of completing the job.
Shareholders in the building materials and construction company hold their annual meeting in Auckland on Tuesday. It is expected to be yet another adulatory gathering, at which new CEO Jonathan Ling will give a trading update.
He has big shoes to fill.
Former chief executive Ralph Waters took Fletcher from net profits of $93 million in 2002 to $379 million this year.
The share price that was $2.75 closed yesterday at $10.10 The company paid a 14c dividend in 2002; it is now paying 40c from revenue which rose from $3 billion to $5.5 billion.
Ling will continue Water's expansion strategy in a two-pronged attack. First, he will buy more assets in New Zealand and maybe in Australia. Second he will lead a charge into new markets hungry for specialist products such as Fletcher's super-light metal roof tiles.
Clay tiles are too heavy in earthquake-prone countries such as Japan and parts of central Europe and the hurricane zones of the United States' east coast and Fletcher is a world leader in manufacturing the specialist metal tiles.
So Ling is planning to expand Fletcher by selling these sorts of products in new areas.
He sees little point in competing against big international firms in generic product categories such as concrete, in which Fletcher can easily be beaten on price and alliance.
Mexican cement giant Cemex SAB's US$12.8 billion hostile lunge at Australia's Rinker Group shows the scale of international competition and the forces Ling is up against. So he has to work out a smarter strategy.
Specialist businesses, such as Fletcher's panel and benchtop maker Laminex - which Ling headed until he got the top job two months ago - could be making their products in Asia soon if his expansion plans succeed.
Fletcher makes and distributes many products needed in New Zealand and Australian house building, from Diamond or AHI roofing to Firth Readymix concrete for the driveway. But there are gaps, so Ling is keen to buy businesses involved in paint, glass, bricks, fibre cement, electrical and plumbing products and sawn timber, says Citigroup analyst Blair Cooper.
On October 27, Fletcher bought the three-store Maddren Timber in northwest Auckland, which First NZ Capital's Andrew Mortimer and Chris Byrne estimate cost between $9 million and $17 million.
That business would strengthen the reach of the Fletcher-owned Placemakers retail chain, they said. And many others in the industry expect Placemakers to expand, giving Fletcher even more power to distribute the products it makes.
After five years of strong performances, $4.6 billion annual sales and a $379 million June year net profit, Fletcher has an embarrassment of riches.
Citigroup's Cooper say that if it finds the right takeover target, it could easily borrow $1.5 billion - it has $1 billion in credit facilities established and the potential to raise another $500 million in new equity.
Without a target, the company could have to pay shareholders some of its riches.
"Management has discussed the potential for expansion beyond Australia and New Zealand, with the caveat being that it will look at acquisitions only if the target is in a business that Fletcher operates in," Cooper says.
But Ling has to overcome obstacles, one being what Cooper terms the "private equity hurdle".
Rising investment interest from private equity funds in the last two years has increased competition for the types of businesses Ling is interested in.
But Fletcher has a couple of levers of its own to pull - synergy benefits from squeezing costs and sharing efficiencies among related businesses, and the ability to buy businesses in low-cost countries.
Ling has another goal. He wants Fletcher in the ASX Top 100 but says lack of share turnover in Australia disqualifies it, even though the company ranks in Australia's top 70 by market capitalisation.
Getting into the big league in Australia will mean larger funds must hold Fletcher stock, so Ling has been promoting the company to Australian retail investors.
But Fletcher will not be moving its head office to Australia in an attempt to redress its share discount. That plan was ditched this year when it was found the discount was due to its 70 per cent reliance on New Zealand for sales, rather than because it was based here.
Cooper ranks Fletcher a "medium risk" company, citing the spectre of a worsening economy causing projects to be postponed or abandoned.
First NZ Capital's Mortimer and Byrne are forecasting Fletcher's net profit after tax will fall to $375 million next year, then rise to $410 million in 2008 and $442 million by 2009.
Although analysts have a varying 12-month target share price, ranging from $9.30 to $11.16, the company is not short of admirers.
Fletcher is in line for another accolade this month - with Fisher & Paykel Healthcare and SkyCity Entertainment Group, it is shortlisted for the Deloitte/Management magazine Top 200 Award on November 23.
Finance Minister Michael Cullen told a Simpson Grierson business breakfast in Wellington this week that the economy needed to increase export activity and diversify into new markets.
"To increase the value of our export endeavour, we need more globally competitive firms that are internationally recognised and able to compete with the best that the world has to offer," he said. .
There's no doubt Fletcher fits that bill.
Building blocks
* Fletcher Building is an NZX and ASX-listed building materials and construction company.
* It employs about 8500 people in NZ, 4600 in Australia, 1800 in the South Pacific and Asia and 600 in North and South America.
* It has five divisions - building products, infrastructure, distribution (Placemakers), steel and laminates/panels.
* The company was headed from 2001 by Ralph Waterswho in September handed over to fellow Australian Jonathan Ling (left).
Price guide
Most analysts are picking Fletcher Building shares to hold or improve on yesterday's close of $10.10. Twelve-month share price targets are:
* Andrew Mortimer and Chris Byrne, First NZ Capital: $10.25.
* Blair Cooper, Citigroup: $9.30.
* Stephen Hudson, Macquarie Research Equities: $10.15.
* Emily Smith and Tim King, Deutsche Bank: $11.16.
* Targets were set before news of Fletcher's stadium contract.
