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Fletcher back in black despite house price hit

Emma Rapaport  |  21 Feb 2019Text size  Decrease  Increase  |  
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Dual-listed Fletcher Building (ASX: FBU) posted NZ$89m in net earnings for 1H fiscal 2019, up from a loss of NZ$273m a year earlier, even amid weakening Aussie house prices. 

Revenue for the half was down $NZ135 million - or 2.8 per cent - to $NZ4.754 billion.

Residential construction across Australia and New Zealand represents around 40 per cent of group revenue, and the Australian segment contributed about one-third to the total in fiscal 2018.

Morningstar director of equity research, Adam Fleck, says cooling house prices in Australia weighed on performance during the half, at the same time as management sought to cut costs by selling off loss-making business units.

These divestments include the pending US$840 million sale of its Formica laminates business, announced in December, and the November sale of Roof Tile Group.

Fletcher chief executive, Ross Taylor, called out the impact of a weakening residential sector in Australia, as tighter lending and falling house prices hit consumer confidence and boosted competition in shrinking markets - particularly in New South Wales and Western Australia.

Tradelink plumbing and bathroom supplies, Iplex pipes, Rocla concrete, Stramit steel products, Tasman Sinkware and Fletcher insulation are its key brands in Australia.

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Morningstar's Fleck says activity from the company's New Zealand residential division was good, but indicates falling house prices in Auckland is cause for some concern.

The company's move into apartments, having primarily focused on detached and semi-detached housing previously, could also flatten its total market opportunity, Fleck says.

Management also announced a dividend of 8 New Zealand cents per share for the first-half, after failing to pay an interim dividend for the first time in its history last year. Fletcher added that its full-year dividend would be weighed towards the final dividend.

Fletcher upgraded its guidance for full year earnings before interest and tax, excluding one-time items and including Formica earnings, to between $650 million and $700 million. Its previous guidance range was $630 million to $680 million, as provided at the annual shareholders meeting in November.

Fleck sees turnaround opportunity for the Australian business in cost restructuring, and anticipates improved margins in the second half. He sees some challenges in the near term with New Zealand's residential construction nearing top of cycle.

Fletcher shares were trading at $4.77 on the ASX at market close, down more than 20 per cent from $6.13 a year ago and at a substantial discount to Morningstar's $6.50 fair value estimate, as set in mid-December.

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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