A slowdown in housing demand may thwart Fletcher Building’s targeted earnings growth in FY23f. Management points to a big backlog of up to 18 months that will support building materials demand, and they may be right.
FBU had given divisional EBIT, cash flow and balance sheet guidance at its recent Investor Day in June, so the actual result had limited surprise factor. Group EBIT of NZ$756 million was broadly in line with the NZ$750 million guidance, while trading cash flow of NZ$462 million was handily ahead of the NZ$350-400 million range indicated. The better cash outcome put the leverage metric in a better light at 0.6x, lower than the guided 0.7-0.8x range.
Guidance for FY23f EBIT has been set at NZ$100 million higher than FY22, assuming no interference from COVID lockdown recurrences and also assuming demand levels remain elevated.
Recent housing credit metrics, however, have been weak through April and May although tracking towards normality in July and August. Housing credit for first home buyers has been tracking c30-40% below last year in June and housing turnover is falling as days to sell is increasing. This could make it tough for FBU’s Residential Development business to reach its targeted volumes.
The backlog therefore becomes a key element if FBU is to achieve its FY23f guidance. The July and August pace of residential sales is roughly what is needed for FBU to achieve its target. A couple of early months’ worth of data still leaves plenty of room for error if economic conditions should send consumer confidence plummeting.
In Construction, a good 2H22 saw EBIT margins in the middle of FBU’s target range of 3-5%. This risk of cost blowouts is heightened given price inflation for materials, supply chain constraints and labour shortages.
Investment view
The recent share price performance reflects some scepticism on the demand for building materials. That does not really match up to the rise in residential consents (over 50k) that is well ahead of New Zealand’s capacity to fulfil (35-40k pa). Allowing for some attrition, if most of these consents convert into completions, FBU is going to be flat out keeping up with the demand. The risk in this scenario is if the attrition rate does become significant and demand is not as great as expected.
There is also a decent amount of work lining up in non-residential construction that would be a buffer.
On balance, we think FBU is well positioned to benefit from the backlog of work.
Risks to investment view
If end demand in New Zealand and Australian markets fails to materialise, earnings growth could be weaker than expected.
Recommendation
We have retained our Buy recommendation.
Figure 1: FY22 Result
