The past year for the construction sector has been tough, with historical lows in residential and commercial building activity. With Fletcher Building delivering its full-year result on Wednesday, business reporter Simon Hartley looks at the sector with Craigs Investment Partners broker Peter McIntyre and Forsyth Barr broker Tony Conroy.
Declining construction demand, increasing material costs and expectations the Christchurch rebuild will not be properly under way until the end of the year indicate another tough period for listed companies such as Fletcher Building and Steel & Tube.
However, while those companies' own reviews and forecasts are tough, their improved profits for the past financial year do not seem to reflect the general malaise in the construction sector, other than both have tightened their belts and completed cost-saving restructurings.
Last week, listed Steel & Tube booked a tripling in profit, from $5.7 million to $17 million, helped by government infrastructure projects.
For Fletcher's full-year report on Wednesday, stockbrokers predict after-tax profits will be up about 8%-9% to about $326 million.
Included in Steel & Tube's results was an overview of the steel and construction sector, with chief executive Dave Taylor highlighting the positives and negatives of the year.
Mr Taylor said Steel & Tube was in good shape, with strong cash flows and balance sheet, and was well positioned for the future.
However, in recounting the previous year, Mr Taylor said there were "subdued performances" in key sectors which led to low demand for most areas of construction, continued competitive pressures and ongoing "squeezed margins".
"The economic environment was slow and subdued, in line with company expectations outlined a year ago, with little upside from a trading perspective," he said.
Craigs Investment Partners broker Peter McIntyre said the official start date for the rebuilding of Christchurch was not generally known, and neither therefore was a time frame for positive effects.
Fletcher's share price had already been pared back by the market because of this.
Its six-month rolling price had a high of $9.53 and a low of $7.05.
It was trading about $7.67 last Friday.
Fletcher is the lead project manager for overseeing the residential rebuild.
Mr McIntyre said Fletcher was "well positioned" to do the job.
However, there were general concerns about ongoing aftershocks, delays in insurance and some of Christchurch's population leaving the city, he said.
Late last week, the Christchurch City Council released a draft rebuilding plan for the city's central business district, worth at least $2 billion, which could take up to a decade to complete.
Mr McIntyre estimated Fletcher's total revenue from the residential rebuild at $3.5 billion, with earnings before interest and tax about $169 million.
Forsyth Barr has upgraded its Fletcher recommendation from "reduce" to "accumulate", with a share valuation at $10.22.
Craigs maintains a "hold" recommendation, with a 12-month price target of $8.62.
Forsyth Barr broker Tony Conroy said "realistically" a definite increase would not be seen until the quarter to December this year.
For Fletcher, that meant the risk to short-term earnings remained "challenging", and would be slower than previously thought, but earnings were still expected to recover.
"Christchurch's rebuilding is an inevitable positive for Fletcher ... the recovery in building is a 'when', not 'if', question," Mr Conroy said.
He forecast a full-year reported profit of $325.9 million, but said this implied the second-half profit would be down 3% compared with the same period a year ago.
"Trading conditions have deteriorated over the past six months.
"New Zealand residential building consents dipped back towards new lows and the Australian building market is also drifting lower," Mr Conroy said.
He expected Fletcher's profit guidance for 2012 would also be for a relatively subdued outlook, but that the medium-term profit outlook for 2013 would be positive.
"The expectations are that housing starts will recover strongly in both New Zealand and Australia, and the rebuilding of Christchurch should also feature as a core area of revenue and profit growth," Mr Conroy said.
For Steel & Tube's past year, government infrastructure projects generated much-needed work, while in Auckland there were several projects under way, including the rail electrification, the Newmarket viaduct replacement and a further phase of the Victoria Park tunnel.
In Christchurch, the southern motorway upgrade had begun.
Mr Taylor described the construction sector for Steel & Tube as "weak", with forecasts on consents and spending "suggesting further decline in the short to medium term".
Residential construction was at historical lows, consents by value weak and net migration negative, but Auckland had a "slowly improving" house market and there was certainty for at least 5000 Christchurch households about to get insurance payouts.
This should provide a "substantial" housing demand in the future.
The question was when.
It might be later rather than sooner, possibly affecting the later stages of this financial year, Mr Taylor said.
A slow start to the present financial year might be worsened by recent global events undermining local sentiment.
Competitive pressure on steel volumes and prices would persist for some time, which could otherwise have countered some deterioration in the construction sector, Mr Taylor said.
