Investor Alert

June 2, 2008, 3:22 p.m. EDT

Fletcher Building Has Admirers Despite a Bruised Profit Profile

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By Rebecca Howard

WELLINGTON, New Zealand -- Construction-products company Fletcher Building /zigman2/quotes/200215142/delayed NZ:FBU 0.00% is having a tough run as a steep housing downturn in its main markets dents earnings, but some analysts still see the stock as a good long-term bet.

Fletcher, New Zealand's third-largest listed company by market capitalization after Telecom Corp. of New Zealand and Contact Energy, has a market cap of more than NZ$4 billion (US$3.1 billion). It has outperformed analysts' expectations in recent years, driving earnings growth with acquisitions that took advantage of booming market conditions.

But one of those purchases -- Formica Corp., of the U.S., acquired for NZ$700 million last July -- hasn't exactly gone according to plan. And overall, grim news from the housing sectors in the U.S. and New Zealand has wiped 30% off Fletcher's share price since the beginning of the year.

On May 20, Fletcher downgraded its full-year earnings forecast on the back of what it called the "severe downturn in U.S. markets," which is hurting Formica's laminated-board business. The company still expects net profit for the year ending June 30 to be NZ$450 million to NZ$460 million, but it said the result will include expected gains of NZ$58 million net of tax, primarily from property transactions.

Shortly after the purchase of Formica, Fletcher had hoped the U.S. company would add US$104 million to the current year's earnings before interest, tax, depreciation and amortization.

Then times turned tough. "The market conditions are a lot worse than we anticipated" at the time of the purchase, says Fletcher Chief Executive Jonathan Ling , pointing to a slide in housing starts. The New Zealand company now expects operations in the U.S. to reduce its earnings for the current fiscal year by NZ$21 million.

Despite the negative news, analysts remain largely upbeat about Fletcher's long-term prospects. Three of five analysts polled by Dow Jones Newswires have a "buy" or "outperform" rating on the stock, while the other two have a "hold" or "neutral" rating. All five peg the 12-month target price well above the NZ$8 where the stock closed on Friday. The New Zealand market was closed Monday for a holiday.

To ABN Amro analyst Dennis Lee , it is important to distinguish the short-term impact of current woes from the long-term fundamentals of the company. Fletcher "is a well-managed company with a healthy balance sheet," he says, adding that its stock trades at a 30% discount to those of Australian peers. ABN Amro has a buy rating on the stock and a 12-month target price of NZ$8.98.

New Zealand remains Fletcher's main market, making up 52% of company revenue, followed by Australia, with 35%. The U.S. represents 6%, and the remainder is in Asia and Europe.

ABN's Mr. Lee says that even in the worst-case scenario, the company's U.S. results in the coming fiscal year are unlikely to be worse than this year, especially given that the restructuring costs have been taken. Fletcher's Mr. Ling also says that in the fiscal year that begins July 1, Formica will "reap the benefits" of the cost cutting that has been done.

While Mr. Lee expects the housing sector to continue to slow in New Zealand along with general consumer demand, he says that ultimately Fletcher will benefit from a shakeout among makers of building materials. "You are going to see a number of players shutting shop," the analyst says. If "you are a company with a strong position, you should benefit in the long term."

Another positive for the stock is the likelihood that the New Zealand's central bank will begin cutting interest rates in the next six months, as policy makers attempt to combat the economic slowdown. A raft of negative data has prompted several economists to predict the rate cuts could start as early as September.

First New Zealand Capital analyst Andrew Mortimer agrees Fletcher has "intrinsic long-term value" despite the sharp downturn in New Zealand's housing market. "There was an earnings downgrade that wiped some short-term value off it, but not much has changed in the long run," he says. First New Zealand Capital has an outperform rating on the stock and a 12-month target of NZ$10.30 -- 29% above the latest close.

The main risk, Mr. Mortimer says, is the "pretty bleak" outlook for New Zealand's residential-property market. However, he notes that a robust backlog of government infrastructure projects should offset any slowdown. While Fletcher's Mr. Ling says he is worried about the housing slowdown in New Zealand, he is betting on that infrastructure business -- which represents roughly two-thirds of his company's business at home -- to support results.

Goldman Sachs JBWere analyst Matthew Henry is slightly more cautious about Fletcher, given the challenging near-term business picture in New Zealand and the U.S. He lowered his 12-month target price to NZ$8.98 from NZ$9.28 after the earnings downgrade while maintaining a hold rating on the stock.

Write to Rebecca Howard at rebecca.howard@dowjones.com

NZ : New Zealand: NZX
$ 7.22
0.00 0.00%
Volume: 651.00
Jan. 18, 2022 10:35a
P/E Ratio
Dividend Yield
Market Cap
$5.84 billion
Rev. per Employee

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