Fletcher Building tipped for NZ$97 mln earthquake reconstruction boost

Fletcher Building tipped for NZ$97 mln earthquake reconstruction boost

Building materials manufacturer and distributor Fletcher Building stands to benefit from Canterbury earthquake reconstruction to the tune of about NZ$97 million in operating earnings over nearly three years, according to Macquarie equities analyst Stephen Hudson.

Hudson’s calculations are based on Fletcher providing about 35% share of materials used in the rebuilding work. Fletcher’s products and businesses include Winstone Wallboards, Pink Batts, Gerard Roofs, Firth, Golden Bay Cement, Winstone Aggregates, Pacific Steel Group, PlaceMakers, Fletcher Construction and Formica.

The positive impact on Fletcher's earnings should come in three ways, according to Hudson. These are; a margin on increased construction and building materials sales, a margin on increased construction and residential sales, and a nationwide increase in building and construction materials pricing. He's predicting overall materials price increases of 0.5% between 2011 and 2013, which he predicts will stick as permanent price increases, or a "NZ$25 million step-up" for Fletcher.

This is, however, a "conservative" estimate and Hudson says every 1% rise in building materials prices would boost Fletcher's operating earnings by NZ$50 million.

He notes that Treasury’s estimate of an economic impact of NZ$4 billion from the September 4 earthquake includes pure building damage of NZ$2 billion, infrastructure damage of NZ$1 billion and content losses of about NZ$1 billion. Neither business interruption costs, nor land costs associated with re-sitting buildings where the ground has become unsuitable for re-construction, have been included in the NZ$4 billion Treasury estimate, Hudson maintains.

He says government sources have suggested the proportion of unreinforced masonry commercial buildings extensively damaged in the Christchurch central business district could be as high as 25% of the gross building area. As such a commercial building damage estimate of NZ$700 million, or about a third of the expected NZ$2 billion cost of damaged buildings, could prove conservative.

“Overall we estimate an operating earnings uplift (for Fletcher) of NZ$97 million over the reconstruction period, which we expect to be October 2010 to June 2013,” says Hudson.

In the year to June 2010 Fletcher, which has pledged NZ$1 million to support people who have suffered loss through the earthquake, made NZ$521 million in operating earnings before one-off items.

Building & construction sectors expected to cope with greater demands

Meanwhile, Hudson says his “crude” estimate is that the building and construction materials sector is operating at a 60% utilization rate and is therefore likely to be able to cope with increases in activity. And if a labour shortage emerges, Hudson expects companies to bring in workers from overseas.

“Opus Consultants is a good case in point,” says Hudson.

“The response from the consultancy has involved all of its 170 Christchurch-based staff, with additional specialist support being sent to Christchurch from its other regional offices.”

Opus has the biggest team of structural engineers on the ground in Christchurch, Hudson adds, and has more on standby in Australia and Britain.

Hudson says his estimated boost to Fletcher's earnings from earthquake reconstruction work could prove conservative if that NZ$700 million commercial building reconstruction expenditure estimate proves too low, if materials prices rise by more than the 0.5% he is assuming, and the NZ$3 billion rebuild estimate proves low, which it could when viewed against the NZ$20 billion total New Zealand construction expenditure expected this year.

On the other hand his prediction could prove high if significant re-sitting work is required because the Earthquake Commission will pay out for that leaving less money for pure rebuilding work, and if the 35% materials market share assumption proves too high. Hudson also says he’s unsure to what extent Canterbury’s commercial buildings are covered by earthquake insurance, suggesting some unreinforced masonry commercial buildings may have low or no coverage.

The Macquarie analyst has raised his 12-month target price on Fletcher shares by NZ$1.64 per share to NZ$9.20 from NZ$7.56. He says 43 cents of this relates to an expected earthquake related earnings uplift and the rest to the removal of a 10% discount to his discounted cashflow valuation on Fletcher that Hudson had in place to capture the perceived likely impact of negative earnings revisions on the stock's performance.

He has also upgraded his recommendation on the stock to “outperform” from “neutral.” Fletcher shares were trading at NZ$8.42 this afternoon.

Fletcher CEO Jonathan Ling told interest.co.nz in a Double Shot interview in June that concerns about debt were restraining the economic recovery as people focused on deleveraging rather than spending money.

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