BusinessDesk: Fletcher Building says first-half profit to fall 10%, full-year earnings growth to stall

By Jonathan Underhill

Fletcher Building, New Zealand's biggest sharemarket listed company, said first-half profit will fall 10% and earnings growth will stall in the full year on weak residential construction and potential delays in the rebuild of Christchurch after further quakes.

Profit in the six months ending Dec. 31 may be decline to about NZ$150 million from NZ$166 million a year earlier. For the year ending June 30, 2012, profit before one-time items will be about the same as 2011’s NZ$359 million, the company said in a statement today.

Fletcher is effectively the lead managing firm for the Christchurch rebuild, a reconstruction effort that’s expected to stoke economic growth and drive demand for the company’s services. In June Fletcher CEO Jonathan Ling told interest.co.nz in a Double Shot interview that rebuilding would not be able to get underway properly until the aftershocks cease.

“In New Zealand, no material improvement in trading conditions is expected in the first half of the 2012 financial year, and the timing of a sustained and meaningful recovery beyond that is uncertain,” Fletcher said.

“In Australia, there is a clear risk that residential and commercial construction activity will remain around the current low level for the balance of the 2012 financial year,” it said.

Reconstruction in Canterbury is expected to pick up in the second half of the 2012 financial year, “assuming a continuing reduction in seismic activity.” Still, the latest magnitude 5.5 quake last Sunday could further delay rebuilding efforts, the company said, citing the government. Treasury expectations are that the rebuilding in Canterbury will not “begin in earnest” until the second half of the 2012 calendar year, Fletcher said.

While building consents have risen in recent months, that hasn’t translated into activity levels, with the number of housing starts holding at “historically low levels.” Infrastructure activity “has remained steady” in New Zealand and is satisfactory in Australia, it said. Australian residential and commercial consents have remained weak, with the Laminex division’s earnings hurt in particular, the company said.

A global surplus of capacity in long steel markets, combined with a high Australian dollar, has weighed on steel export earnings across the Tasman. On a brighter note, Fletcher’s Formica laminated board business is managing to lift earnings in North America, Europe and Asia.

Fletcher's shares shed 11%, or 83 cents, to $7.07, heading for the lowest close since July 2009. Before today, the company was rated ‘outperform’ based on the consensus of 10 recommendations compiled by Reuters. Today’s move surprised analysts who had toured the company’s Crane facilities in Australia late last month with no hint then of a downgrade.

“There’s a bit of angst around the timing of this,” said Paul Harrison, equities manager at BT Funds Management. “And it sends a bit of a signal in terms of the rest of the economy.”

Fletcher’s announcement comes after carpet maker Cavalier Corp. said sales fell about 20% in the first quarter and the uncertain market conditions meant it couldn’t give any meaningful full-year guidance.

Fletcher is effectively the lead manager for the rebuild of Christchurch and has face set-backs in the process as the region was rocked by a series of earthquakes since the original damaging temblor in September last year, the latest being magnitude 5.5 last Sunday.

Reconstruction in Canterbury had been expected to pick up in the second half of the 2012 financial year, “assuming a continuing reduction in seismic activity” though the latest quake could push that out to the second half of calendar 2012, Fletcher said, citing Treasury estimates.

Rival construction firm Fulton Hogan has said spending on the rebuild could channel funding away from other regions.

BT’s Harrison said the Christchurch rebuild will happen eventually, helping underpin Fletcher’s longer-term valuation. “People are reacting today over what this means for the 2012 year,” he said.

While building consents have risen in recent months, that hasn’t translated into activity levels, with the number of housing starts holding at “historically low levels,” Fletcher said.

Infrastructure activity “has remained steady” in New Zealand and is satisfactory in Australia, it said.

Australian residential and commercial consents have remained weak, with the Laminex division’s earnings hurt in particular, the company said.

A global surplus of capacity in long steel markets, combined with a high Australian dollar, has weighed on steel export earnings across the Tasman.

On a brighter note, Fletcher’s Formica laminated board business is managing to lift earnings in North America, Europe and Asia.

(Updated with analyst reaction, share price fall)

(BusinessDesk)