New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Fletcher Building Building a Head of Steam

NEUTRAL
Fletcher Building (FBU) has provided 1H21 EBIT guidance of NZ$305–320m at its annual shareholders meeting. This guidance is in line with our expectations of NZ$308m. We have lifted our EBIT forecasts to reflect a sustained period of robust NZ residential activity continuing over CY2021. Given current levels of activity may require extra cost-in, we suspect that&nbsp;FBU's&nbsp;ability to sustain current margins may be hindered. Additionally, we are cautious of the level of non-residential activity on both&nbsp;sides of the Tasman, with forward indicators and and anecdotes suggesting a thinning pipeline. We remain NEUTRAL rated, with near-term momentum now largely factored into consensus&nbsp;and the medium-term tempered by macro uncertainty, persistant competitive pressures, and execution risks.


What's changed?&nbsp;



Earnings:&nbsp;FY21–23 EBIT +7%/+5%/+1%
Target price:&nbsp;+4% to NZ$5.85



NZ residential the bright spot in a mixed macro


Management continues to remain cautious on the medium term given limited order book visibility beyond early CY21. We expect robust NZ residential activity to sustain well into CY2020 underpinned by low interest rates, tight supply, and a historic under build. In Australia, while residential activity for the September quarter was at its lowest level since 2014, record low interest rates, stabilisation of house prices, and government stimulus bode well for detached housing, but closed borders and lower inner city rents present challenges for the apartment construction pipeline.​​​​​​​ The thinning non-residential pipeline on both sides of the Tasman will likely weigh on activity over CY2021 and the timing of larger government backed infrastructure investment remains uncertain.


Excitement tempered by uncertainty and track record


Our thinking on FBU's earnings track (albeit with stronger-for-longer NZ residential activity) remains unchanged; a solid FY21 supported by a robust operating environment that tempers over FY22 as activity slows and competitive pressures and cost-in sees FBU give back some margin. We note that benefits from prior cost out initiatives have never clearly materialised into earnings, because either they were not delivered or the savings were consumed by inflation and/or margin pressures. As such, we are cautious on the sustainability of FBU's lower cost base/higher margins. We lift our our target price to NZ$5.85, driven principally by upgrades to our near-term earnings forecasts. We retain a NEUTRAL rating.



Rohan Koreman-Smit CFA
rohan.koreman-smit@forsythbarr.co.nz
+64 9 368 0085





Ashton Olds
ashton.olds@forsythbarr.co.nz
+64 9 368 0127



Fletcher Building: Building a Head of Steam