Fletcher eyes quake effect on profit

The Canterbury earthquake will mean plenty of work for the construction industry. Photo / Greg Bowker

The effects from Christchurch's earthquake and the leaky building crisis are being weighed up in Fletcher Building's outlook.

Jonathan Ling, chief executive of New Zealand's largest listed company, made a presentation to the Citi Australasian Investment Conference this week.

He touched on the financial benefits of the disasters to the company's bottom line and said the quake might boost the business next year, while leaky buildings could provide more work in the additions and alterations market.

"All Fletcher Christchurch-based businesses are back up and running. Trading in Christchurch has been quiet while repairs are assessed and insurance claims are lodged," Ling said.

No significant impact on trading result was expected in the first half of the 2011 financial year. Residential rebuilding activity was expected to accelerate in second half of the year.

Fletcher Construction is running the Earthquake Commission's project management office and Ling said commercial and infrastructure repairs were expected to take place over a longer period of time.

Fletcher Building shares closed up 18c yesterday at $8.20.

Rob Mercer, of Forsyth Barr Research, said the building sector was only operating at 66 per cent capacity.

"Therefore there is scope for the industry to accelerate the labour/material resources required to help rebuild the city."

The 2011 financial year had looked tough for the sector.

"The reality is the Christchurch earthquake will bring forward the increase in building activity that was very much needed. The cost of repairing the damage has brought forward our target for Fletcher's mid-cycle earnings by six to 12 months, from 2012 to 2011," Mercer said.

The quake would help restore plant utilisation in Fletcher's cement and steel operations, boosting operating margins.

"Fletcher, being New Zealand's largest building supplies and construction company, will be at the forefront of providing materials and labour to undertake the major construction projects in the region," Mercer said.

Ling said PricewaterhouseCooper's report to the Government on leaky homes estimated 22,000 to 89,000 dwellings were affected.

"Consensus forecast is 42,000 dwellings require repair, at a total cost of $11.3 billion, 10 years for complete remediation and a new scheme proposed from the first quarter of 2011," he said.

Commercial building activity levels in the non-residential sector were at their lowest levels since early 2004.

The value of non-residential building consents to August was $3.97 billion, down 21.8 per cent on the prior year.

"Shortage of development finance is hampering sector recovery," Ling said.

The biggest falls had been in office buildings, storage and warehouses.

New Zealand residential building approvals are running at about 16,000 annually compared to a 15-year average of 23,700. Apartment consents are running at 15-year lows, down 45 per cent, but single dwelling consents are up 28 per cent.

Alterations and additions are up 2.8 per cent after two years of decline.

"Leaky home remediation is expected to positively impact this trend," Ling said.

"Caution is required in formulating outlook for 2011," Ling said, noting New Zealand's slow and gradual continuing recovery in residential building activity.

Commercial construction activity was expected to remain at very low levels.

Infrastructure spending was likely to dip in 2011 before growing in 2012, he predicted.

In Australia, residential building activity was expected to be sustained but commercial work likely to remain subdued.

Fletcher's business in North America and Europe might see gradual improvement but timeframes were uncertain. Asia appears to be Fletcher's strongest area, Ling saying most markets there had "reasonable growth prospects".

Fletcher's longer term strategy is to improve earnings reliability, maintain and improve internal capabilities, increase focus on growth-oriented capital expenditure and pursue acquisition opportunities where they meet investment criteria.

NZ'S BIGGEST

Fletcher Building:
* 1st on NZX
* 62nd on ASX
* 30 per cent Australian-owned
* 23 per cent NZ-owned
* $6.7b revenue
* AGM on November 17