Analysts pick strong year ahead for building giant Fletcher Building

New Zealand construction giant Fletcher Building is being picked to have a strong year ahead by analysts, albeit with caution about softening economic conditions in Australia.

As with the previous financial year, declining fortunes in Australia's mining, construction and infrastructure markets are key concerns to analysts, but all have forecast 2017 earnings before interest and tax (ebit) beyond the top end of Fletcher's financial guidance.

Craigs Investment Partners is picking Fletcher's full year 2017 ebit will be above the company's top-end guidance of $760 million, at $764m, while brokerage Forsyth Barr is similarly above guidance, estimating ebit at $766m.

Craigs broker Peter McIntyre said, in a recent review of Australian building materials, that Fletcher was his key pick in the building materials sector, the company will deliver strong market growth, particularly in New Zealand.

The company had a continued focus on cost reductions and business turnarounds, a strong management team and there was likely to be an upgrade to ebit guidance, McIntyre said.

Forsyth Barr broker Damian Foster said the strength of New Zealand's construction cycle was the dominant driver of Fletcher's medium-term outlook, although other factors were also in play.

Some included Fletcher's targeted investment for growth; having given guidance of an expected 49 per cent ebit gain from residential growth over the coming three years and a turnaround in several subsidiaries, including Iplex Australia, Formica Europe and Insulation Australia.

There had been "solid activity" on Australia's east coast, but conditions in Western Australia had begun to weaken, he said.

Foster said the most material near-term risk was a reverse in the elevated Australian housing construction sector. This only represented about 10 per cent of Fletcher's earnings and the company had relatively low exposure to multi-tenanted dwellings, which had dominated the Australian boom.

Fletcher was the top Craigs pick and carried a "buy" recommendation, as did stock in James Hardie Industries and Brickworks, while there was a "hold" recommendation on stocks of Adelaide Brighton, Reliance Worldwide and GWA Group.

McIntyre expected the February reporting season for building materials stocks would be positively impacted by continued macroeconomic strength in the Australian, New Zealand and US housing markets.

"However, we're more cautious on the outlook for Australian multi-family housing demand given financing and oversupply challenges in Melbourne and Brisbane in particular," he said.

Craigs' was predicting Australian housing new builds to decline by 12.8 per cent during full year 2017 to 200,000, largely due to softer family demand.

Fletcher Building

• Forecast earnings before interest and tax
• Fletcher: $720m-$760m
• Craigs Investment Partners: $764m
• Forsyth Barr: $766m
• Analysts' consensus: $760m