Strong profit increases expected for Fletcher Building

Share market darling Fletcher Building is expected to reveal strong increases in full-year profit and operating earnings when it posts annual results on Wednesday.

However, the building materials manufacturer and distributor will be watched closely for any hints of a slowdown throughout 2006 and 2007.

In May, Fletcher upgraded its earnings forecast for the third time during the 2005 financial year. The acquisition of Australian building products group Amatek Holdings and strength in the non-residential building and infrastructure markets was offsetting a slowing residential building market, Fletcher said.

Full-year operating earnings should be between $560 million and $580 million. The top of that range would be a 26 per cent increase from last year's earnings before interest and tax of $460 million.

"I don't believe there's any chance they can miss that on the low side," said Tower fund manager Paul Robertshawe. "If anything they might go through the top end slightly. Most of their markets look pretty strong."

As recently as November's annual meeting, Fletcher predicted operating earnings of only $475 million to $500 million.

First NZ Capital analyst Andrew Mortimer said Fletcher's results have exceeded guidance regularly over the past two years, meaning there are "significant expectations" about the full-year results and outlook comments.

Mr Mortimer said he expected operating earnings of $571 million, net profit after tax of $319 million compared with $239 million last year, and almost double 2003's $168 million, and an annual dividend of 28.5c per share, up from 23c.

Goldman Sachs JBWere analyst Terry Tolich predicted a full-year net profit of $303 million and a dividend of 31c.

"The big picture remains one of weakening residential building, largely offset by rising non-residential and infrastructure spend," Mr Tolich said.

Macquarie Equities analyst Stephen Hudson expected operating earnings of $573 million, profit after tax of $318 million and a 31c per share full-year dividend.

Fletcher's shares have almost doubled in value from $4 in August 2003 to $7.19 on Friday.

Eyes will also be on the performance of Amatek, bought for $582 million in March. That buy follows two other Australian acquisitions -- laminate and woodpanel firm Laminex for $754 million in 2002 and Tasman Building Products for $260 million in 2003. Amatek is expected to contribute $22 million to Fletcher's operating earnings.

"Laminex and Tasman have done very well so far," Mr Robertshawe said. "So there's no reason to believe they won't be integrating Amatex pretty effectively."

In February, Fletcher posted a 33 per cent rise in first-half operating earnings to $288 million, an interim dividend of 15c per share, up from 11c, and net profit of $161 million compared with $111 million in the first-half of 2004.

Mr Tolich recently revised his 2006 and 2007 forecasts for Fletcher. They show little "slippage" relative to 2005, despite slowing New Zealand building activity. He expects a recovery in Australian residential building in 2007, when New Zealand building activity is still likely to be falling, boosting Amatek.

Despite geographical diversification, Fletcher is still regarded as a cyclical business, prone to the ups and downs of the economic cycle.

"I don't think they've bought their way out of being a cyclical business," Mr Robertshawe said.

"What they have done by the timing of acquisitions means that gains from full-year ownership of acquisitions offset cyclical downturns in New Zealand unless they're very severe".

- nzpa