Cost Blow-Out Rattles Fletcher Building

Australia | Dec 21 2022

This story features FLETCHER BUILDING LIMITED. For more info SHARE ANALYSIS: FBU

A cost blow-out of $150m stands out in an underwhelming market update from Fletcher Building. 

-Fletcher Building warns of $150m earnings hit as AICC costs exceed estimates
-Full guidance reiterated despite weakening residential market
-Waipapa Pine acquisition sees the company step into New Zealand timber

By Danielle Austin

The headline news from Fletcher Building’s ((FBU)) latest market update has been the $150m earnings impact expected from the New Zealand International Convention Centre (NZICC) rebuild.

Costs for the project have exceeded initial expectations, with the company attributing the cost blow-out to more complicated than expected remediation, particularly concerning water damage, and inflationary impacts. Costs now exceed the scope of insurance cover for the project, which remains on track for completion in 2025, as per original guidance. 

Elsewhere, the company appears to be trading largely in line with expectations, and while full year earnings guidance of NZ$855m was reiterated, the company expects the upside beyond this it previously anticipated has somewhat dissipated amid a weakening residential market. While demand for building materials for residential construction has remained strong and volumes in line, residential sales are tracking below expectations and weighing on Fletcher Building’s outlook. This has been outpaced by softer than expected civil operations. 

The company also announced its first steps into the New Zealand timber industry with the acquisition of Waipapa Pine and Renewable Wood Fuels Limited, as well as confirmation that it will proceed with the construction of the Taupo plant panels project. 

Fletcher described Waipapa as a geographically advantaged producer of sawn timber projects, with an add-on renewable fuels business. The acquisition came at a cost of NZ$97, with Fletcher Building expecting it will add NZ$20m in earnings by FY25. 

Brokers prepare for decline that Fletcher Buildings still considers uncertain 

Assuming a -19% peak to trough New Zealand volume decline will impact in the second half, Macquarie (Outperform, target price NZ$8.00) believes its valuation sufficiently factors in a step down from first half peaks. The broker does, however, feel the market is preparing for a meaningfully deeper decline. 

Macquarie predicts a meaningful inflection point, in both New Zealand household formation and affordability, will emerge in the coming six months. The broker maintains its view that Fletcher Building is a structurally better business post-covid. 

Morgan Stanley (Overweight, target price NZ$5.90) found New Zealand product sales volumes to be in line with expectations, and Australian operations to be demonstrating improvement. Further, it finds Fletcher is slowing build rates to account for an anticipated market decline. 

Jarden (Buy, target price NZ$6.22) and Goldman Sachs (Buy, target price NZ$5.90) both have a focus on the impact of the higher costs from the New Zealand International Convention Centre project. 

Jarden highlighted the $150m provision would be treated as a significant item within first quarter results, but cash impacts look likely to flow through to FY24. Goldman Sachs noted the NZICC cost blow-out was a particular blow given the company had implied investors had seen the last of construction downgrades. Lowering its target price, the broker described the bad as only somewhat dampening the good.

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