The COVID-affected first half result is not reflective of what Fletcher Building is capable of producing. A previously sceptical market is slowly being convinced that the key Construction and Australia divisions can meet their targets and carry the group to its target.
FBU’s 1H22 result was marred by COVID restrictions in Australia and New Zealand. In New Zealand alone, the impact on revenue and EBIT was estimated to be NZ$300 million and NZ$100 million respectively. Once the restrictions were eased, revenue and earnings recovered quickly. For example, Building Products EBIT margins increased from 10.9% in 1Q22 to 19.3% in 2Q22. All divisions experienced a positive margin shift from the first to second quarter in the period.
The second quarter up-swing has given management the confidence that not only is the 2H22 period going to be better, but the FY23f EBIT margin of c10% of external revenue can be achieved. A resilient demand backdrop will help the business maintain its operating cadence, and if the politicians can restrain themselves instead of the economy, then FBU has a good shot at its goal.
We highlight the Construction and Australia divisions which could get tantalisingly close to their own FY23f EBIT margin target by 2H22f. These divisions are the key drivers of management achieving the FY23 group EBIT margin target.
Investment view
In June 2018, FBU first set out its goal of the stated EBIT margin by FY23f and it was fair to say, there were not many believers. The restrictions imposed by COVID-19 clearly didn’t help. Investor reticence has only recently begun to change as the pent up demand is quickly filling the divisional tributaries. FBU has good order visibility into the end of 2022 and customers are following through on commitments.
The steep rise in materials prices could threaten the recovery, but FBU has not seen an increase in cancellations. In fact, the opposite seems to be happening. Customers are increasing purchase orders beyond initial commitments putting FBU in the awkward position of putting some customers on allocation.
The share price can be supported by the buyback when it is reactivated. It is only one-third of the way into its NZ$300 million target and the company was willing to purchase shares up to A$6.96 at the end of last year. With greater clarity on operating performance and the outlook, purchases above this price are possible.
FBU has given guidance for FY22 EBIT at approximately NZ$750 million and group EBIT margin at c9.5%. Together with the dividend payout nudged to the top end of the payout range suggests management is gaining in confidence on the outlook.
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.
