Daily ShareChat: Fletcher Building

By Jenny Ruth

Saturday 8th January 2011 1 Comment

Fletcher Building's proposed acquisition of Australia's Crane Group could deliver value in the medium term but in the near term it is more likely to weigh on Fletcher's share price performance than to be a support, says Matt Henry, an analyst at Goldman Sachs JB Were.

"We see downside risk to the market's expectations" of Crane's net profit for the year ending June 2012 of $53 million, up 32% year-on-year according to Bloomberg, "and therefore to the level earnings per share benefit, given the current soft indicators for Australian construction," Henry says.

"We believe the medium-term synergy benefits would likely be material (magnitude uncertain) through the rationalisation of head office costs and given the considerable crossover between Crane's businesses and a number of Fletcher Building divisions," he says.

The proposed acquisition, at a price-to-earnings multiple of 19.2 times Crane's 2011 earnings and 14.5 times its 2012 earnings, "has reignited concerns about Fletcher's capital allocation discipline which are founded on the 2007 acquisition of Formica - the $1 billion acquisition delivered earnings before interest and tax of $24 million in full-year 2010," Henry says.

"We do not expect the macro environment to be conducive to 'proving' of a Crane acquisition in calendar year 2011."

Recommendation: Hold.

Comments from our readers

On 19 May 2011 at 11:59 pm jerry said:

synergies will definitely greater than the premium that fletcher paid to crane, right? otherwise why would fletcher want to by crane? if yes, shouldn't fletcher value the synergies first and think whether to buy crane... why potential synergies is value is not available yet?