Fletcher dazzles the market

Chief executive Ralph Waters says the priority was reliability of earnings. Picture / Martin Sykes

An unexpected leap in Fletcher Building's half-year profits and an upgraded full-year forecast rocketed the company's shares up by 58c to a record high yesterday.

"The numbers blew us all away," said Forsyth Barr's head of research, Rob Mercer.

Analysts' forecasts fell $20 million short of the $161 million after-tax profit the company reported for the half year ended December 31, which was 45 per cent higher than the profit reported at the same time last year.

They hurried to upgrade full-year figures after Fletcher Building's chief executive, Ralph Waters, undertook the "pleasant task" of upgrading expected full-year earnings by 10 per cent.

While the Bank of New Zealand yesterday warned of a looming recession in residential construction, Waters was confident.

"There's nothing I see in the outlook for the next year that is terribly frightening to us."

He said the company anticipated earnings of between $525 million and $545 million in the year to June 2005, up from a November prediction that full-year profits would range from $475 million to $500 million.

Mercer said he believed the company could even beat the top end of the new range for the full year.

After reaching prices as high as $7.43 during the trading session, Fletcher Building shares finished the day at an all-time high of $7.37 - up 58c, or 8.5 per cent on the previous day's close.

Waters couldn't hide his satisfaction at a briefing in Auckland, dubbing the result "by far the most exciting" he had presented since he joined the company in 2001. Only two of the company's 35 business units are showing weaker earnings, and those only marginally lower, proving his strategy of divorcing the company from the New Zealand economic cycle through expansion into Australia has worked.

He said shareholders had been sick of watching Fletcher Building's earnings sink whenever the economy turned down.

"My biggest priority, right from the outset, was improving the reliability of our earnings ... by this stage if we haven't demonstrated that I don't know what will," he said.

"A good part of this profit improvement is due to the acquisitions we made in Australia. They are now significantly ahead of the forecasts made when we decided to buy the businesses."

Analysts said the biggest surprise had come from the company's building products division, which increased earnings to $121 million from $74 million even though it was already feeling the effects of a downturn in the Australian residential market.

Other divisions also performed strongly - earnings from distribution rose to $42 million from $36 million, earnings from the infrastructure division were up to $77 million from $62 million, and the laminates and panels division improved to $56 million from $48 million.

The overall result reflected strong demand through the period, and an extra three months of earnings from Tasman Building products, which the company bought in September 2003.

But analysts said the key had been Waters' ability to shrug off cost pressures from such things as the rising cost of oil through economies of scale and unlocking capacity constraints.

"This company continues to surprise us. Its management is top class," said one analyst. The company's rising dividend - Waters yesterday announced a sixth consecutive dividend increase with the interim dividend rising to 15c a share from 11c - also contributed to its credibility.

Looking ahead, Waters said the company would not have "fully passed its exam" until it had gone through a downturn in New Zealand.

He said that one economic forecaster was predicting a 3 per cent decline in the total building market next year, while another said the total value of the building market in the larger market of Australia would grow 6.9 per cent over the same period.

"Who knows whether that's right, but they have been accurate this year," he said.

Waters said that in some of the company's businesses it was still not able to meet demand with existing capacity - and even if the market slowed next year that meant they could be manufacturing more than they did this year because additional capacity had come on stream.

Despite widespread expectations that local housing construction would slow few doubted that Fletcher Building would weather a downturn well.

"I don't think there's any scepticism left," said First New Zealand Capital analyst Andrew Mortimer.

He already believed Fletcher Building could pass through a downturn intact, but it would now be doing so at a higher level than he expected.

"My own view is it would be hard for 2006 to be a better year than 2005, but in saying that I don't think earnings will come down a lot."

A more immediate focus for the company will be concluding its attempt to buy Australian building products company CVC Amatek.