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NZ Core: Fletcher Building

Last Price: $5.09
Sector: Construction
Market Cap: $4,344M
Morningstar Valuation: $6.50

Fletcher Building has lowered its fiscal 2019 earnings guidance, reflecting tougher-than-anticipated conditions within its Australian businesses. Fletcher now expects EBIT (Earnings before Interest & Tax) in the range of $630 million to $680 million in fiscal 2019, with the midpoint of the updated guidance range 6.5% below prior guidance provided in August 2018.

While the New Zealand business is tracking Fletcher's expectations, input costs are pressuring margins in Australia while volumes are also soft given falling residential construction activity.

Contraction in Australian residential approval numbers in the first quarter of fiscal 2019 have impacted Australian sales volumes, particularly the Stramit, Laminex, and Tradelink businesses. We already anticipate lower Australian construction activity near term and continue to expect total housing approvals to fall by 5.5% in fiscal 2019.

Margins have been impacted so far in fiscal 2019 by continued input cost pressures, particularly energy and resin prices-a continuation from fiscal 2018. But we expect long-term margins to be driven higher by tighter cost control, operating leverage in the distribution division, and a higher mix of infrastructure projects relative to commercial projects, toward a midcycle level of just over 9%. Meanwhile, residential consents in New Zealand are tracking our expectations, at an approximate annual figure of 30,000 compared with our forecast for 30,100 consents.

On ther positive side of the ledger, there was no change to B&I provisioning (the area where the bulk of recent imparirments have come from) and positive commentary on Formica (which is up for sale).

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