Analysts welcome Fletcher's Higgins deal

Mark Adamson says Fletcher has been talking to Higgins about a deal for about two years. Photo / Steven McNicholl

Fletcher's $315m acquisition of road builder hailed as 'sensible move'.

Analysts have welcomed Fletcher Buildings' $315 million Higgins Group acquisition, lifting their valuations on the shares and earnings estimates for the Penrose-headquartered business.

David Leitch, Andrew Moller and Stephen Liu of UBS said the deal "seems a sensible move" and raised their NZX share valuation from $9.77 to $10.01 and projected a 1 per cent, or $35 million, lift in earnings before interest and tax for the June 2016 financial year, followed by a 3 per cent lift in 2017.

Fletcher shares closed down 5c yesterday at $7.14 on the NZX.

They also indicated Fletcher was now better placed to capitalise on the Government's $4.4 billion state highway investment from 2015 to 2018.

"We maintain our 'buy' rating and believe Fletcher is attractive on a long-term view," the UBS trio said.

Andy Bowley and James Bascand of Forsyth Barr described the Higgins deal as a strategic positive undertaken at a full and fair price.

Fletcher chief executive Mark Adamson explained the rationale for the deal. "We've been involved in road construction for the best part of 100 years ... [but] we didn't actually have an organisation that could lay the [road] pavement itself."

Road maintenance was now a significant part of the sector, he said.

"In addition to just constructing the road they want you to maintain it for a period of up to 20 years and that gives Fletcher a nice consistent stream of earnings that we can rely on. And then secondly the macro picture is, you saw the Prime Minister last week announce pulling forward some of the infrastructure work."

Fletcher and Higgins shared a similar culture, Adamson said.

"Despite being a big public company, we do have a family feel to the business as clearly they do.

"Part of the success of any acquisition when you go in is to make sure you do have a similar cultural alignment, as well as making sure all the financial metrics work," he said.

"We've been talking to them [Higgins] for two years now about should we [or] shouldn't we, and if we did, how would we do it. There's been an awful lot of effort go into making sure how we make a success of it."

Adamson said a divisional reorganisation of the company was in some respects driven by the Higgins announcement "which does mark the end of quite a few major moves in terms of the portfolio".

James Grigor, equity strategist at Macquarie Private Wealth, said roading was set to become a bigger part of Fletcher's construction business and the Higgins acquisition would enhance the firm's ability to secure major infrastructure contracts.

"This gives Fletcher a full offering now and they can be competitive in their tendering," Grigor said.