KEY POINTS:
Analysts are expecting a solid result from materials manufacturer, distributor and supplier Fletcher Building tomorrow but some have raised questions about its United States business as the credit squeeze and sub-prime mortgage crisis take their toll.
Fletcher Building shares took a steep fall yesterday, closing down 33c at $9.19.
The consensus of analysts is that Fletcher is expected to announce an interim after-tax profit of between $212 million and $239 million. This compares to last year's first-half profit of $193 million.
Fletcher's acquisition of Formica Corporation of the US last year is being viewed with interest and the half-year result is expected to be a clear display of the company's performance there.
Stuart Graham, an analyst at UBS, raised questions about this.
"There's uncertainty if you look at the macro picture. It's pretty hard to see it performing on the upside in the United States," he said.
Graham has a neutral rating on the shares and has a target price of $10.15.
Fletcher's share price has been hit hard lately, falling from a high of $13.42 in May last year.
Grant Williamson of Hamilton, Hindin Greene noted this and attributed the big drop to housing market weakness in the US.
He also noted the state of the local housing market outlook but said he still expected a good half-year result.
Rob Mercer at Forsyth Barr is more optimistic, warning that the impact of the US economic downturn should not be overestimated.
"Formica is only 7 per cent of Fletcher's business," he said, or 12 per cent if Formica's operations in Europe and Asia were factored in.
Yet Fletcher's construction order book was extremely strong, rising from $770 million to stand at about $1.1 billion now, a sum which did not take into account the company's contract to upgrade Eden Park for the World Cup, nor the impact on earnings of Transit's planned tunnel from Mt Albert to Waterview, Mercer said.
Regardless of whether Fletcher Infrastructure scored the tunnel job, enormous amounts of materials which Fletcher supplies - including aggregate, steel and cement - would still be needed to complete the tunnel, Mercer said.
"The outlook for non-residential construction is still for reasonable growth," he said.
House prices had risen nearly 50 per cent in the last three years yet building consents were down around 20 per cent from 2004 to last year, Mercer said.
Forsyth Barr is valuing Fletcher shares at $14.67 and because the company's shares are trading at such a big discount, ForBarr is maintaining its "buy" recommendation.
The McEwen Investment Report praised the company for diversifying.
"The impact on Fletcher's earnings of a downturn in building needs to be kept in perspective as its business mix has improved significantly in recent years, both in products and geographic spread. While building products and steel divisions are slowing in line with the residential property market, the company is benefiting from more resilient and partly recession-proof infrastructure development.
"Clearly there are risks investing in a building materials company in the peak of a cycle but the company looks to be in good stead for the future ... but cyclical risks remain," the report said.
BIG EARNER
* Fletcher Building made $484 million after tax in the June 2007 year.
* That was 28 per cent ahead of its annual result a year before.
* The company's market capitalisation now stands at $4.6 billion.
* Chief executive Jonathan Ling will announce its result tomorrow.
