New Zealand construction giant Fletcher Building is being picked by analysts to have a strong year ahead, albeit with a cautions about softening economic conditions in Australia.
As in the previous financial year, declining fortunes in Australia’s mining, construction and infrastructure markets are a key concern to analysts, but all have forecast 2017 earnings before interest and tax (ebit) beyond the top end of Fletcher’s financial guidance.
Craigs Investment Partners is picking Fletcher’s full year 2017 ebit will exceed the company’s guidance of $760million, at $764million, while brokerage Forsyth Barr is estimating ebit at $755million. In a recent review of Australian building materials, Craigs broker Peter McIntyre said
Fletcher was his key pick in the building materials sector and would deliver strong market growth, particularly in NZ.
It had a continued focus on cost reductions and business turnarounds, had a strong management team and was there was likely to be an upgrade to ebit guidance, Mr McIntyre said.
Forsyth Barr broker Damian Foster said while the strength of New Zealand’s construction cycle was the dominant driver of Fletcher’s medium term outlook, other factors were also in play.
Some included Fletcher’s targeted investment for growth. It gave guidance of an expected 49% ebit gain from residential growth over the coming three years and a turnaround in several subsidiaries, including Iplex Australia, Formica Europe and Insulation Australia.
He said while there had been "solid activity" on Australia’s’s east coast, conditions in Western Australia had begun to weaken.
Mr Foster said the most material near-term risk was a reverse in the elevated Australian housing construction sector. It represented only about 10% of Fletcher earnings and the company had relatively low exposure to multi-tenanted dwellings, which had dominated the Australian boom.
While Fletcher was Craigs’ top pick and carried a "buy" recommendation, so too did stock in James Hardie Industries and Brickworks Ltd. However, there was a "hold" recommendation on stocks of Adelaide Brighton, Reliance Worldwide and GWA Group.
"We expect the February reporting season for the building materials stocks will be positively impacted by continued macroeconomic strength in the Australian, New Zealand and US housing markets.
"However, we’re more cautious on the outlook for Australian multi-family housing demand, given financing and oversupply challenges, in Melbourne and Brisbane in particular," Mr McIntyre said.
Craigs was predicting Australian housing new builds to decline by 12.8% during full year 2017 to 200,000, largely due to softer family demand. In full-year 2018, Mr McIntyre expected units built would decline by 9%, to around 182,000 units, but said that was still about 16% above the historical average of 156,000 units.
New Zealand residential consents were expected to peak in full-year 2018, but a lag may mean peak occurred after this, while non-residential activity was forecast to remain steady at elevated levels, and infrastructure construction was expected to continue to grow. However, Mr McIntyre said in Australia residential activity was expected to gradually decline following its 2016 peak, and little growth is expected in non-residential activity.
