Construction giant Fletcher Building is facing looming completion deadlines at several major projects, but there may be a silver lining in construction cost overruns in Christchurch and the backlog of residential housing.
Craigs Investment Partners researchers recently completed visits to major Fletcher projects in Auckland and Christchurch that revealed some potential risks to its widespread construction division.
Craigs broker Peter McIntyre said while it remained clear that construction demand was holding up around the country, particularly with the infrastructure backlog, the visit to Christchurch's justice precinct revealed the possibility the project would be extended beyond the June 2017 end date outlined to the market in March.
The justice and emergency services precinct in Christchurch was started in 2012 and is valued at $300million.
Mr McIntyre said notwithstanding the justice precinct risk, he believed each additional $50million construction cost overrun represented an additional 15c per share value, prompting Craigs to maintain its ``buy'' rating on Fletcher stock.
Within Fletcher's construction division, its ``building and interiors'' had the largest share of the total $2.8billion of backlogged work.
Building and interiors' share was $1.4billion; infrastructure, such as bridges and roads, accounted for $911million; Higgins roading contracts, $425million; and projects around the South Pacific, mainly commercial and some infrastructure work, $72million.
``All but one of Fletcher's major projects under way in building and interiors is a fixed price or guaranteed contract,'' Mr McIntyre said.
Three major projects made up a significant proportion - 60% - of the building and interiors backlog, Mr McIntyre said. Of the total $1.4billion, about 50% related to two key projects.
The first was Commercial Bay Precinct in Auckland, with a total value of $680million, which Mr McIntyre believed was ``on time and on budget''.
The second project was the New Zealand International Convention Centre, Sky City, with a total value of $700million. Mr McIntyre believed it was running late, but noted it was not due for completion until mid-2019.
Mr McIntyre said New Zealand housing demand was at present 39% above the historical average. ``While it is possible additional restrictions for investors will slow the market, in Auckland in particular, it appears there's a significant backlog in demand,'' he said.
That was due to both construction delays and net migration, which should limit any near term negative risk to a 10% decline.
He said New Zealand residential housing represented 24% of Fletcher's earnings and even if housing fell 10%, that represented 2.4% of Fletcher group revenue.
Separate from the construction division, Mr McIntyre said business performance appeared strong.
``Strong demand for construction materials in New Zealand should underpin solid earnings,'' he said.
Construction materials represented 21% of full-year 2016 earnings before interest and tax.
``Demand in New Zealand is currently so strong that concrete needs to be booked in weeks in advance,'' he said.
