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Fletcher Building Too Cautious, Too Cheap

Australia | Nov 30 2022


Predicted New Zealand residential housing cycle decline isn’t enough to turn analysts off Fletcher Building, seeing through-the-cycle value in the company. 

-New Zealand Residential declines likely to drive headwinds for Fletcher Building in coming years
-Analysts largely feel downside is accounted for in the share price

-Management has put company in much better position compared with previous downturn

By Danielle Austin

Despite predicting New Zealand residential consents to decline over the coming years, Goldman Sachs feels trough valuations for Fletcher Building ((FBU)) may be overdone. The broker considers the New Zealand residential market is at, or nearing, cyclical peaks, and anticipates residential consents to decline -1% over 2022, -14% over 2023 and -15% over 2024.

Despite cyclical headwinds, Goldman Sachs, who this week initiated coverage on Fletcher Building, feels downside is more than accounted for in the current share price.

Residential end market account for 47% of the region’s revenue, but the broker expects exposure to non-residential and infrastructure end markets will offer some insulation, with these segments accounting for respectively 27% and 26% of regional revenues.

Residential consents for the year to September are tracking well ahead of the ten year average at 50,700. While the Australian residential market is also expected to face challenges, this segment accounts for only 9% of total revenue.

Goldman Sachs anticipates the current fiscal year will deliver peak earnings and margins for the company, but that group earnings will decline -4% per annum from FY24.

The broker feels this decline is priced into the current share price, and more specifically that the share price accounts for a -40% decline in residential construction demand in New Zealand.

By comparison, Goldman Sachs predicts a -30% peak to trough decline, and that efforts to reduce the fixed cost base and improve product mix on top of efficiencies leaves the company better placed than in prior downturns. 

Guidance shows conservatism, brokers see a number of buffers

Within FNArena's daily coverage, brokers are largely in agreement Fletcher Building's guidance for FY23 looks conservative.

This includes Macquarie (Outperform, target price NZ$8.20), which agrees Fletcher Building has materially improved its business since the last cycle peak. This broker particularly highlighted strength in the company’s cement division, and notably in its Golden Bay Cement business. 

Noting Fletcher Building guides to earnings of NZ$100m in the current fiscal year, Citi (Outperform, target price NZ$6.53) also highlights conservatism in guidance and sees upside risk to its own outlook.

This broker expects growth investment returns and better than anticipated housing activity to flatten the decline over FY24 and FY25. Looking past the year ahead, a strong balance sheet, attractive valuation and potential improvement to the housing outlook all underpin Citi’s constructive outlook. 

Similar sentiments were echoed by Jarden (Buy, target price NZ$6.30), which is not part of FNArena's daily coverage.

In its last update on Fletcher Building in late August, Jarden noted New Zealand house prices were declining faster than had been expected, driving the broker to assume prices will bottom out by March 2023.

This broker also expects a subsequent earlier return to growth, anticipating banks are well placed to breathe life back into the housing market as the downturn approaches an end. Jarden sees a fundamental undersupply of housing in New Zealand as supporting Fletcher Building's return to upper-mid cycle trading.

Only four of seven daily monitored brokers in Australia cover the company, but all have a positive rating.

Trading around $4.70 on the ASX today, the shares carry the promise of 8.4% and 8.3% yields on current consensus estimates, when translated back into AUD.

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