Fletcher Building Limited (FBU)
BUY

Weather the storm

 15 Feb 2023
Sector: Materials

1H23 RESULT

Need To Know

  • NZ weather impacting FY23 earnings, downgraded EBIT from >NZ$855m, to now NZ$800-$855m
  • 1H23 EBIT up 8% to NZ$360m, although well below consensus (NZ$414m, -13%)
  • NZ18.0cps dividend declared, in line with pcp

Group revenue of NZ$4.3bn was marginally below the NZ$4.4bn expected, although the largest miss was at the EBIT level (NZ$360m vs NZ$414m market), largely driven by the residential and development division on softer house sales, partly offset by good growth and margin in concrete and building products. FBU declared a flat dividend of NZ18.0cps. 

Guidance downgrade. Adverse weather is impacting residential market activity, which drove downgrades for FY23 group EBIT from >NZ$855m, to now be between NZ$800-$855m. Within this, FBU are targeting ~800 units sales for the Residential business, of which only ~390 are contracted to date, delivering a target EBIT of ~NZ$185m. Materials and distribution businesses are expected to generate ~NZ$700m of EBIT, with volumes broadly in line with 1H23 however management’s expectations are for volumes to decline 10-15% in FY24 against peak levels, cautioning a soft backdrop. Construction earnings will continue to be impacted by weather related project delays, and FBU is targeting EBIT of ~NZ$35m.

Leverage has increased from 0.6x to 1.25x (within target range of 1-2x), principally related to a rebuild of land and housing stock within the residential and development division. Net debt of NZ$1.4bn has risen significantly because of working capital investments in the period as well as the expected net capex investment of NZ$301m.

Longer term the business is well positioned for a softer FY24, with expected growth beyond that. FBU is focussed on holding margins close to FY23 levels with strong control of overhead costs and pricing, which it can quickly flex depending on market activity. FBU is targeting returns on funds employed (ROFE) of >15%.  

Investment View

Despite the short-term impacts from adverse weather, FBU remains well positioned to deliver on its growth targets. Underlying ROFE of 17.8% is above its target, and we expect this to continue. The market is clearly factoring in cyclical risk, trading at ~9x forward earnings, compared to a 5-year average of ~14x. Whilst FBU may struggle to reach the top end of its guidance given it will need to sell close to ~800 homes and is currently only at ~380, we believe the market is not factoring in a recovery on the other side of higher interest rates and a property market bounce back. We note however that the share price will likely only re-rate when there is more clarity on the shape of the cycle and on interest rate expectations.

Figure 1: Earnings largely impacted by increased funding costs

Figure 2: FBU PER trading under 1SD of its historic average on cyclical earnings risk

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Stock Overview

Share Price

Company Overview

Fletcher Building has operations in building products, concrete, steel and retail distribution. Its business covers Australia and New Zealand with earnings sensitivity to housing starts in both countries and commercial construction in NZ. 

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