Company Reports

No-moat Fletcher Building is raising NZD 700 million as new Chief Executive Andrew Reding shores up the balance sheet. While fiscal 2024 net debt/adjusted EBITDA was at the top end of the company’s target range of 1 to 2 times, the equity raise was unexpected. At the fiscal 2024 earnings result, management expressed interest in a partial sale of the residential and development business, likely retaining some ownership while a partner runs the business. But with limited buyers in New Zealand and longer approvals for overseas buyers, the process appears likely to be more protracted than the company desires.

Fletcher Building is a New Zealand building supplies company. We estimate about 65% of its revenue is tied to residential construction, 25% commercial, and about 10% infrastructure.

Fletcher Building is a New Zealand building supplies company. We estimate about 65% of its revenue is tied to residential construction, 25% commercial, and about 10% infrastructure.

Fletcher-owned company Iplex has reached an agreement with the Western Australian government and local building contractors to pay for repairs from Pro-Fit pipe leaks.

We maintain our NZD 3.20 (AUD 2.90) fair value estimates for no-moat Fletcher Building and consider it fairly valued. Underlying fiscal 2024 EBIT fell 35% to NZD 509 million, in line with our expectations. Likewise, revenue of NZD 7.7 billion, flat with the prior year, was expected. Group EBIT margin of 6.6% fell from 10.2% in fiscal 2024, driven by cost pressures and volume declines given the cyclical challenges facing the residential construction sector.

Fletcher Building is a New Zealand building supplies company. We estimate about 65% of its revenue is tied to residential construction, 25% commercial, and about 10% infrastructure.

Fletcher Building is a New Zealand building supplies company. We estimate about 65% of its revenue is tied to residential construction, 25% commercial, and about 10% infrastructure.

Fletcher Building has found a buyer for its Tradelink plumbing supply business in Australia. The sale, to privately owned company Metal Manufactures, is for AUD 170 million. There are no regulatory or other conditions to complete the sale, which is expected to be completed by the end of September 2024. We calculate the transaction to be roughly value-neutral.

Fletcher Building reports operational issues with the ship used to transport cement around New Zealand’s North Island for its Golden Bay cement business. The ship is owned and operated by a third party and it is uncertain when it will be repaired. Our fair value estimate for no-moat Fletcher Building is unchanged at NZD 3.20 (AUD 2.90) per share. While there is a short-term hit to its profit, it is not material to our fair value estimate and not expected to have long-term ramifications.

We raise our fair value estimate for Fletcher Building by 10% to NZD 3.20 (AUD 2.90) per share, with the transition of coverage to a new analyst. A key driver of the upgrade is a lower weighted average cost of capital, now 9.4% and in line with our other Australasian industrial coverage, from almost 10% previously. We also forecast a 5% increase in midcycle operating income, driven by new acquisitions and strategic growth projects in the building product and distribution segments, and a better-performing Australian business.

Fletcher Building is a New Zealand building supplies company. We estimate about 65% of its revenue is tied to residential construction, 25% commercial, and about 10% infrastructure.

Changes to Fletcher’s banking agreements provide additional financial flexibility if the recovery in New Zealand construction takes longer than expected. Fletcher has twice downgraded its earnings expectations for fiscal 2024 amid weaker residential construction demand, and we forecast a deterioration of net debt/EBITDA to 2.3 times at the end of fiscal 2024, above the firm’s target of 2.0 times. Although we view the balance sheet as stretched, we do not expect the firm to breach its covenants, but the new, more generous short-term covenants and longer loan terms provide extra leeway if needed.

Fletcher is more troubled than we had appreciated. After several weak announcements, including two earnings downgrades, we've taken a fresh look at the no-moat firm. We cut our fair value estimate by 52% to NZD 2.90 per share (AUD 2.70). We've revised our operating margin assumptions considering Fletcher’s persistently recurring significant costs and downgraded our near-term earnings with a weaker macroeconomic outlook.

Fletcher Building operates across six segments: building products; distribution; concrete; Australia; residential and development and construction. Fletcher's earnings are tied to construction activity in Australia and New Zealand. In fiscal 2023, EBIT was approximately split: 25% building products; 17% residential and development; 16% distribution; 18% concrete; 21% Australia; and 3% construction.

We place no-moat Fletcher Building under review with yet another disappointing trading downgrade, as we assess what this means for our future assumptions and, ultimately, our fair value estimate.

Fletcher Building has appointed Nick Traber as acting CEO. Traber’s role is effective from March 29 until a permanent CEO is appointed. We think Traber looks well-placed for the position, having been CEO of the company’s concrete division since 2021. The concrete business is a strong-performing business, with EBITDA increasing by about 20% during Traber’s tenure as CEO over the past two financial years. Prior to this, Traber spent most of the past two decades in various positions with building materials company Holcim, including holding CEO roles in Europe and South America.

Fletcher Building operates across six segments: building products; distribution; concrete; Australia; residential and development and construction. Fletcher's earnings are tied to construction activity in Australia and New Zealand. In fiscal 2023, EBIT was approximately split: 25% building products; 17% residential and development; 16% distribution; 18% concrete; 21% Australia; and 3% construction.

We maintain our fair value estimate for no-moat Fletcher Building at NZD 6.00 per share. We modestly lift our fair value estimate for shares listed on the Australian Securities Exchange to AUD 5.70 based on the current New Zealand/Australia exchange rate. Fletcher reported first-half fiscal 2024 EBIT of NZD 264 million and downgraded full-year earnings guidance. Consequently, we cut our fiscal 2024 operating earnings forecast by one fifth to NZD 580 million, about the midpoint of management’s updated guidance. The operating environment will continue to be challenging over the remainder of the fiscal year with a contraction in new house builds and renovations weighing on volumes and margins. However, we expect a gradual recovery in the residential sector from fiscal 2025 and our mid- to long-term forecasts are largely unchanged.

We maintain our fair value estimate of NZD 6.00 (AUD 5.50) for no-moat Fletcher Building. The firm is expecting an additional NZD 180 million in pretax costs. This includes NZD 165 million to complete the New Zealand International Convention Centre, or NZICC, following a fire in 2019, and NZD 15 million to remediate quality issues at Wellington International Airport, or WIAL. We raise our pretax cash cost forecasts—for NZICC by NZD 165 million to NZD 440 and NZD 15 million for WIAL. The additional cash costs are modestly dilutive to our fair value, but this is offset by the time value of money.

We maintain our fair value estimate of NZD 6.00 (AUD 5.50) per share for no-moat Fletcher Building following its annual shareholders meeting and trading update. In the New Zealand materials and distributions business, Fletcher reported volumes from residential customers are expected to be about 5% softer over fiscal 2024 than prior guidance, due to slower demand for residential housing. Despite this, Fletcher’s own residential construction business is reporting strong year-to-date sales, reflecting its positioning as a lower-cost housing provider, enabling it to maintain demand through the downturn. We have lifted our fiscal 2025 volume estimates for the residential development business, offsetting a fiscal 2024 decline in volume in the materials and distribution business.