KEY POINTS:
Weakening housing data and the cautious tone of this week's annual meeting has prompted one analyst to downgrade the share price outlook for construction giant Fletcher Building.
Stephen Hudson, analyst at Macquarie Research Equities, said he had lowered his 12-month price target from $13.30 to $12.40 due to
the tone of Tuesday's annual meeting and worrying house sales data.
Fletcher, with a market capitalisation of $5.8 billion, closed at $11.68 yesterday, down on a year high of $13.42.
Hudson wrote in his report to clients that the tone at the AGM could be a reflection of recent macro-economic data rather than any weakness in Fletcher's operating performance. But he said that meeting's tone could also be reflective of weakening house sales data.
Fletcher's $1 billion acquisition of United States-headquartered Formica earlier this year was struck at the New Zealand dollar trading at a certain rate, but this had fluctuated and there could be integration issues at Formica in the US, he wrote.
"They have subsumed two plants into a single plant and are running behind on scrap rates/labour rates," he wrote.
He also questioned the financial basis for Fletcher's earnings projections.
"Fletcher has guided net profit after tax to a range of $450 million to $460 million, in line with the majority of analyst forecasts," he said. Macquarie would have preferred the company to couch guidance on earnings before interest and tax (ebit) terms, partly because of the refinancing and tax issues associated with the Formica purchase, Hudson wrote. Fletcher appeared to be comfortable with ebit at its assessed market level of $806 million, he wrote.
He questioned what would happen to Fletcher if residential dwelling permits fell from about 25,000 annually to about 22,000 consents.
"Given the poor showing in New Zealand house sales activity through winter and the reasonable correlation between sales and consents, it is worth looking at what Fletcher's earnings might look like under a more severe residential downturn scenario," Hudson wrote.
However, he did note the company's robust trading performance this year, the construction backlog rising from $700 million to $1 billion and overall confidence from the Formica purchase.
Blair Cooper at Citigroup noted that the Formica rationalisation was taking longer than expected. But he remains confident that a targeted $34 million expected from restructuring benefits after this purchase can be delivered next year and in 2009. Although residential construction was slowing, he noted Fletcher management expected any downturn in this sector to be offset by unsatisfied demand for non-residential construction which was running at record levels.
But this work was not guaranteed and could dry up.
Emily Behncke and Sally Clarke of Deutsche Bank wrote in their report that they continued to favour Fletcher over rival Boral and said Fletcher was trading at a 21 per cent discount on a price-earnings basis to Boral. Tuesday's meeting added little new information since the full-year result announced in August, they said.