Pressure ahead on Fletcher earnings

Jonathan Ling. Photo / Sarah Ivey

New Zealand's biggest listed company is expected to return to bottom-line profitability when it issues its annual result in Auckland on Wednesday.

Jonathan Ling, Fletcher Building chief executive, last year announced a $46 million net after-tax loss but this year the company has said it expects to meet the range of analysts' forecasts of $261 million to $340 million, excluding unusual items.

Earnings were likely to be at the lower end of the range, the business told investors at last November's annual meeting held in Dunedin.

In the last few weeks, Forsyth Barr's Rob Mercer said he was anticipating $295.8 million net after-tax profit for the June 30, 2010 year and further big gains until 2012 when Fletcher will make $439.2 million.

With an "accumulate" recommendation on the stock, Mercer has some qualms about the construction workload next year.

The number and value of big commercial jobs are expected to fall, construction margins are under pressure, less work is around due to lack of mezzanine finance and the economy is not picking up fast.

"The outlook for New Zealand commercial construction activity has softened heading into 2011, placing Fletcher's earnings for 2011 under pressure. Fletcher now relies on a solid recovery in residential building activity to help offset the anticipated shortfall in near-term major construction projects.

"However, building activity is poised to recover strongly in 2012, both residential and non-residential," Mercer said.

"We expect Fletcher's earnings outlook to stabilise heading into 2011. However, there remains the ongoing challenge of another decline in non-residential building activity in 2011 being offset by a fragile recovery in residential building activity, off a very low base.

"Fletcher's operations in Australia appear to be performing relatively well, mainly due to the Rudd Government handouts, with the latest policy to accelerate spending on schools helping to prop up earnings for laminates and panels, and Stramit with steel rolled coiled products," he said.

The Australian Government suddenly axed the country's insulation scheme which Ling is expected to touch on this week.

Fletcher has said it intends to maintain a dividend at 14c a share for each half year but the final decision is dependent on Wednesday's result.

By February, when Ling announced the half-year result, the company said its full-year outlook was depended on an "uplift in New Zealand and Australian new housing construction markets being sustained".

"Government infrastructure spending in NZ and Australia will help to underpin construction, concrete and steel businesses. Weak commercial building activity is expected to continue. Insulation will benefit from government stimulus package, but scheme changes will reduce contribution in second half. Asia is expected to continue growth overall, Europe expected to remain weak, North American volumes expected to be stable at low levels," the company said.

Fletcher is the country's largest building and building materials company with operations in building products, cement and concrete, steel making and distribution, construction, wood panels and insulation and building materials distribution. It has operations in Australia, Fiji, India, Asia and the United States.

Substantial shareholders are Perpetual with 10.8 per cent, Capital Group 6.1 per cent, Perennial 5.7 per cent and AMP Capital Investors 5 per cent.

Fletcher's shares closed at $7.35 on Friday, down 12c.