Fletcher Building loss has no nasty surprises

Wednesday 12th August 2009

Fletcher Building, New Zealand’s biggest construction company, posted its first loss since 2001 as expected and said cost cutting and debt reduction made it well placed for an eventual recovery. The shares jumped almost 5%.

The net loss was $46 million in the year ended June 30, from a profit of $467 million a year earlier. The result reflected weaker earnings in all businesses except steel, and one-time items of $360 million from costs for impairments such as a write-down at its Formica unit, plant closures and downsizing. Operating cashflow rose 23% to $533 million while net debt fell 27% to $1.35 billion.

Fletcher has responded to the worst economic slump in 30 years by closing manufacturing plants to meet reduced demand, trimming dividends to preserve cash and freezing salaries. It raised some $526 million to repay debt and strengthen its balance sheet and is benefiting from the government’s accelerated infrastructure spending, winning contracts such as Auckland’s Victoria Park roading project.

“They have run it very prudently,” said Paul Robertshawe, who manages about $250 million at Tower Asset Management. “I think they’re cautiously optimistic, without saying so.”

Robertshawe expects Fletcher to be into the “upgrade cycle” by February next year and may be able to make more meaningful comments about the outlook as early as the annual meeting in November.

Shares of Fletcher climbed 4.8% to $7.36 and have climbed 25% this year, almost twice the gain in the NZX 50 Index. The shares are rated ‘outperform,’ based on the average of eight recommendations compiled by Reuters.

Sales in the full-year were little changed at $7.1 billion while earnings before interest and tax fell 27% to $558 million.

“This year has been about maximizing our cash earnings during a recession and restructuring the business so that we are strongly positioned for the economic recovery, when it comes,” chief executive Jonathan Ling said.

The company declined to forecast 2010 earnings, citing “the degree of uncertainty in many of our markets.” Accelerated spending by on infrastructure by New Zealand’s government will only partly make up for a downturn in commercial projects and is likely to have a lagged impact, it said.

The outlook for 2010 “is subdued and most markets are expected to record continuing low levels of activity relative to recent years,” it said.

“Volumes in the first half of the year will be lower,” Ling said on a conference call.

At an operational level, earnings fell across five of the company’s six divisions, with Steel showing the only gain. Operating earnings from steel rose 54% to $154 million, helped by stronger prices and shortages in the first half.

Earnings from laminates and panels, before one-time items, fell 3% to $74 million from $101 million. Earnings from Laminex more than halved to $54 million while Formica’s earnings rose 11% to $18 million. Operating earnings from infrastructure halved to $105 million and distribution earnings dropped 59% to $30 million.

Earnings from building products fell 28% to $106 million, reflecting deteriorating housing markets in Australia and New Zealand an higher input costs. Fletcher will pay a final dividend of 14 cents a share, down from 24.5 cents a year earlier and bringing the full-year payment to 38 cents.

The construction and building products producer, the second-biggest company on the NZX 50 after Telecom, is preparing for a changing of the guard as it tightens its belt in the downturn. Chairman Rod Deane plans to retire in March, and is expected to be replaced by the highly rated former chief executive Ralph Waters.

In the past two months the company has announced the closure its particleboard factory at Kumeu on deteriorating demand and the consolidation of its Australian medium density fibreboard plants.

Businesswire.co.nz

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