Fletcher downgraded on slow Canterbury rebuild

Fletcher Building chief executive and former Formica North America chief executive Mark Adamson Photo / Dean Purcell.

Fletcher Building, which holds the mandate managing the Earthquake Commission's repair programme in Christchurch, faces the prospect of sharply lower earnings than previously forecast because of a slower Canterbury rebuild, according to an analyst report.

Research and broking house Craigs Investment Partners expects Fletcher will reap just $33 million in earnings before interest and tax from the Canterbury rebuild in the 2015 financial year, having previously estimated an ebit contribution of as much as $91 million, according to the May 6 report. The rebuild will likely make up about 5.8 percent of Fletcher's annual ebit between 2014 and 2017, down from a forecast 10.2 percent.

"Given the size and scope of the rebuild, we believe it is more realistic to factor in delays at this stage," the report said. Craigs downgraded the stock to a 'hold' with a price target of $9.95, from a previous 'buy' recommendation with a $10.77 price target.

Fletcher shares rose 0.4 percent to $9.34 in morning trading, paring some of yesterday's 2.7 percent decline. The stock has gained 9.3 percent this year.

Mark Lister, head of private wealth research at Craigs, told BusinessDesk the construction company has had "a good run this year" on an improving economic outlook and expectations for the Canterbury rebuild.

"Our Sydney-based analyst pulled it back to a 'hold' partly on the basis the shares have had a reasonably good uplift over the last few months," Lister said. "It's not to say we're getting negative. It's just a look at the value gap that has closed somewhat."

New Zealand's second-biggest city was devastated by a series of earthquakes in 2010 and 2011, leaving an estimated $40 billion bill to rebuild Christchurch. The reconstruction effort has started to gain momentum this year, though a survey of senior leaders in the city this year showed growing impatience with delays and concerns over the management and procurement of major projects.

The Craigs report also warned of potential structural issues Fletcher faces in its Australian businesses, which account for about half the group's earnings, including the end of the Australian federal government's subsidy on retrofitting insulation. Earlier this year Fletcher described Australian conditions as soft.