Fletcher Building first half profit solid but warns on future

By NZPA

Wednesday 12th February 2003

Fletcher Building warned today its solid first half result on the back of an upbeat residential construction market may tail off next year.

Fletcher Building doubled its net profit to $83 million in the six months ended December compared with the same period in 2001, beating forecasts by about $5 million, with all divisions of the company lifting earnings.

After an initial 6c leap on the news this morning, Fletcher Building shares closed down 12c to $3.55.

Chief executive Ralph Waters warned that weakening economic growth in the company's key trans-Tasman markets could undermine the result in the second half of the financial year, compounded by a stronger New Zealand dollar.

However, he anticipated a "satisfactory" full year result.

The company's building products division doubled its profit to $66 million for the period, while construction rose just $3 million to $16 million.

Concrete profit almost doubled to $44 million, and distribution was up $10 million at $25 million.

Analysts are divided on whether the building boom, with new building permits for houses at a 16-year high, could continue at the same pace this year.

A forecast slow down in home building within the next 12 months would trim Fletcher Building's lucrative residential building business.

On the other hand, the smaller construction division looked positive with several significant projects, including Meridian Energy's $1 billion Project Aqua, expected to come to fruition in the next 12 months.

Forsyth Barr Frater Williams research manager Rob Mercer said the market reacted negatively to the outlook on the building sector, despite the company's positive performance.

"The market looks quite a long way ahead, and it's just that uncertainty about the momentum in earnings. Not so much this year because we know that's going to be strong, and we are putting through a 10 percent upgrade in earnings, so it's not insignificant," Mr Mercer said.

"It's a good quality result, but the market's also aware it's a cyclical company and, looking at the medium term risks, (expects) a slow down towards the end of this year and next year."

"We've got the view that the residential cycle is probably peaking... (but) there are a lot of projects in infrastructure."

The company said there was a $500 million backlog in construction, and positive medium-term prospects in commercial building and engineering.

The result included an $8 million contribution from the Laminex group, acquired on November 13.

"From a strategic point of view, the highlight of the period was clearly the acquisition of the Laminex group in Australia, which diversified the company's revenue and earnings base," Mr Waters said.

The acquisition reduced Building's reliance on New Zealand economic cycles, with the company deriving 67 percent of revenues from New Zealand, 25 percent from Australia, and 8 percent from Asia and the Pacific rim.

Fletcher Building has turned itself around in the last two years, reversing a $41 million interim loss in 2000.

"The latest result continues a trend of strong earnings growth over the past two years, driven by internal improvement programmes and buoyant market conditions," Mr Waters said.

"Market conditions in both New Zealand and Australia remained strong, and our operations were positioned well to take advantage of this following improvements in operational efficiency, overheads and prices during the past two years," he said.

The company will pay a dividend of 9 cents per share with full tax credits, up from the 6cps interim dividend for 2001.

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