Fletcher Building exceeds market expectations with $93 million

By NZPA

Wednesday 14th August 2002

A construction revival has helped Fletcher Building exceed market expectations for its annual profit and stage a major turnaround from the previous year's loss.

After posting a loss of $272 million last year, the company announced a June year net profit of $93 million today, beating forecasts of $85 million.

Improved operating margins, lower overheads and stronger demand were the key drivers, the company said.

It announced a final dividend of 8c per share, taking the total dividend for the year to 14cps compared with 12cps last year.

Seemingly inexplicably, Fletcher Building shares fell after the announcement, closing down 7c at $2.85.

But brokers said there were several reasons including a weak overall sharemarket, unfulfilled speculation of a share buyback or increased dividend, and a strong run-up to the result.

"Often the market reacts prior to the result and when it comes out and it's pretty much on the money...(the share price) sort of fades a bit," said Alan Wills of Forsyth Barr Frater Williams.

Chief executive and managing director Ralph Waters said the company expected to see strong demand continue through the first half of the current year before easing in the second half.

"Our overall expectation for the current year is for another satisfactory result."

Analysts said the turnaround of the company was in no small part due to the arrival of Mr Waters last year.

He had reversed years of declining profitability, boosting Fletcher Building's asset base by at least $300 million, cutting costs and steadily selling non-core assets.

While admitting that Mr Waters had been assisted by a couple of good years thanks to a housing boom, Salomon Smith Barney analyst Blair Cooper said the new chief executive had also earned the confidence of the investment community.

Today's result reflected both healthy market conditions and a dramatic improvement in internal performance, said ABN Amro analyst Dennis Lee.

"You look at all the divisions. The margin expansion has been very strong," he said. "Cost reduction, productivity improvement -- that improves the margin."

"It's a good result. It's better than what the company has pre-announced."

Earnings of $205 million before interest, tax and unusual items (ebit) rose 188 percent on the previous year, confirming a substantial increase flagged by the company in June.

The largest improvements were found in the company's South American operations, the upstream steel business, residential construction and the Placemakers distribution operation.

Ebit for the company's building products division rose 47 percent, concrete up 94 percent, construction up 500 percent and distribution, up 89 percent.

Total operating revenue rose 30 percent to $2.97 billion and the company's operating surplus before unusual items and tax rose 166 percent to $154 million. Cashflow was $187 million, and net debt and capital notes dropped by $126 million.

Proceeds from sales were $54 million. They did not include the $US10 million ($NZ21.98 million) sale of Fletcher Building's Bolivian operations, mostly involving concrete, announced today.

Mr Waters noted the result represented a 16.9 percent return on average equity and 23.1 percent on average funds employed.

"These returns are well ahead of the company's cost of capital. They are based on a solid improvement in internal performance, which is very pleasing and will continue to benefit the company.

Mr Waters said the construction business had begun the new financial year with a very strong backlog. The company said it had hedged its electricity supply by 50 percent but current power price rises would continue to affect earnings.

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