Good run for Fletcher Building to continue into next year

By NZPA

Monday 12th August 2002

The past year has been something of a transformation for Fletcher Building, which is expected to produce glowing annual results on Wednesday.

Since the arrival last year of new chief executive Ralph Waters, former managing director at Australian appliance and metals company Email, Fletcher Building has reversed years of declining profitability.

Mr Waters has "absolutely stamped his mark" on Fletcher Building, Salomon Smith Barney analyst Blair Cooper says.

During his watch, Mr Waters has boosted Fletcher Building's asset base by at least $300 million, while steadily selling non-core assets and cutting costs following its spin-off from the unwieldy Fletcher Challenge conglomerate in March 2001.

"Most CEOs, when they come in, do attempt to stamp their mark. Ralph's been a little lucky, he's come into the business in a year which has been better than the last couple.

"That's helped him, but nevertheless he earned the confidence of the investment community with what he's demonstrated in terms of controls over spending, sorting the businesses out, selling the bits that don't fit in, and providing a vision to go forward," Mr Cooper said.

In June, Mr Waters said he expected Fletcher Building to post a higher-than-forecast profit of $200 million, before abnormal items -- $166 million more than the previous year.

However, Mr Cooper believes Fletcher Building will surpass its forecast.

"Knowing Ralph, if he said he's going to deliver $200 million, I'd put my money on somewhere between $205 million and $210 million."

Strong New Zealand residential and non-residential activity in 2001/02 will have built up the company's bottom line.

"It's been a very good year for them. I think 2003 is going to be better -- you're not seeing the peak of the residential cycle just yet, we don't pick the cycle to peak until November," Mr Cooper said.

Lower than expected interest rates could even prolong the cycle, perhaps well into the second half of the financial year, he said.

Fletcher Building benefits when interest rates are low because people are more likely to invest in an expensive asset, such as housing, when money is cheap.

Fletcher Building is on a mission to educate the market that it is more than a construction company, although that is probably its most high-profile division, having built several iconic structures including Auckland's Sky Tower.

Fletcher Building's successful distribution businesses and its building materials operations were bigger, Mr Waters said.

"We also happen to have a construction business, which is the leading construction business in New Zealand, and it's important -- 10 to 15 percent of Fletcher Building.

"The reason I'm sensitive about that description is that the sorts of investors who invest in a construction company recognise there is greater risk."

However, Mr Waters is not considering jettisoning the division.

Being a big fish in a small pond, Fletcher Building has secured its position by minimising access to the market for offshore giants, for example by owning material distribution business Placemakers, and the country's largest construction company.

He is reluctant to spook the market or give too much away so close to the results.

"Other than to say I think that for the long-term good of Fletcher Building, deriving 100 percent of its earnings from the cyclical and small New Zealand market isn't wise for the long term."

Fletcher Building is unlikely to look north of Australia, and would concentrate its offshore efforts on low-risk building material manufacture, rather than construction.

Salomon Smith Barney values Fletcher Building stock at $3.45, compared with its current level of $2.89 and its year-high of $3.13.

Mr Waters said the undervalued stock had been a victim of Fletcher Building's success. Most professional investors had snapped up the shares after analysts said earlier this year it was one of the top-10 picks for the year.

"And even though we've come out with a profit upgrade to say we're going to exceed $200 million (earnings) when the market was expecting $170 million, we've seen our share price go down because all of the local buyers already have their full quota," Mr Waters says.

"What we lack is enough overseas interest, not just in Fletcher Building but in the New Zealand stockmarket, for there to be buyers standing there to relieve New Zealand funds of their holdings."

Mr Waters has joined other business leaders in meeting with overseas investors to push his company's profile.

"It's a painful task to go around the world in 10 days and see five or six people a day and tell them all the exact same thing, but it's an important thing to try and broaden the interest in your stock."

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