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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Fletcher Building 1H22 Result – First impressions</h2>
Fletcher Building’s (FBU) 1H22 EBIT (before significant items) was NZ$332m, and slightly below our forecast of NZ$340m with the cost of 1Q22 lockdown shutdowns greater than expected. The 1H22 result was boosted by industrial land sales (NZ$47m) and the revaluation of land (NZ$9m) on transfer to FBU’s new retirement living operations (Vivid Living). &nbsp;While 1Q22 was impacted by lockdown shutdowns FBU saw a strong rebound in 2Q22 with EBIT +43% yoy and EBIT margin of 10.2% (excluding land sales) with strong outcomes in building products, concrete, distribution and Australia. The final dividend was slightly below our forecast (18cps vs.&nbsp;19cps) but FBUs balance sheet metrics remained strong with net debt to EBITDA of 0.4x despite a NZ$107m investment in the residential division and NZ$122m inventory rebuild.
FBU has guided to FY22 EBIT of c.NZ$750m before NZ$25-50m of impacts of Omicron in 2H22 (ForBarr NZ$685m and Bloomberg consensus NZ$697m). FBU has also guided to group EBIT margin of 9.5% (excluding land development) and stated it remains firmly on track to deliver its c.10% group EBIT margin target in FY23. The market has been sceptical that FBU would achieve its margin target and the strong 2Q22 run rate and 2H22 guidance should underpin an uplift in medium term consensus expectations. We are OUTPERFORM rated.
Key features of the result:
<ul>
<li>NZ Core (Building Products, Distribution, and Concrete) EBIT was NZ$211m, down -5% prior year. Building products was impacted by 1Q21 lockdowns but 2Q22 saw a strong recovery with EBIT +62% yoy and EBIT margins of 15.5%. Concrete EBIT of NZ$61m was flat on prior year, with revenue growth and cost disciplines helping to offset inflationary pressures. Distribution EBIT down -5%, however 2Q EBIT margins were 8.5%.</li>
<li>Residential EBIT up +81% on 1H22, albeit this includes an abnormally large industrial development sale of Rocla site for NZ$45m, as well as a NZ$9m internal transfer revaluation gain of Vivid Living. Residential lots sales were -11% yoy but average price was +33%.</li>
<li>Australia revenue and EBIT up +4%. Margins were flat on the prior year albeit 1Q was impacted by lockdowns and 2Q saw margins increase +0.6ppts on 1H22 to 4.1%. Building products EBIT up +14%, Distribution +13%. Steel saw revenue growth, however FBU also called out rapid input cost pressures.</li>
<li>Trading cash flow was impacted by NZ$122m lift in inventory, with FBU calling out c. 40% of 1H22 inventory was a rebuild of stock levels from after FY21 low levels, with the rest due to higher sales volume and higher input prices. Net debt lifted to NZ$442m (year end FY21 NZ$173m) and leverage to 0.4x EBITDA below the target 1.0-2.0x range (FY21 0.2x). NZ$200m remaining of the on market share buyback announced at the May investor day.</li>
</ul>
Outlook comments
FBU has guided to FY22 EBIT of c.NZ$750m before NZ$25-50m of impacts of Omicron in 2H22 (vs. ForBarr NZ$685m and Bloomberg consensus NZ$697m).
FBU’s medium term outlook expectations includes 1) “stronger for longer” activity in NZ particularly in residential where homebuilder order books are full for the next 12-18 months and consents are running above industry capacity, 2) easing of COVID impacts with no repeat of 1H22 headwinds borders open, skills shortages easing, and 3) investment pipeline to deliver growth beyond FY23 ((1) extra capacity in plasterboard, insulation, panels, (2) expanded low carbon concrete offer, (3) growth in residential development (targeting 1,400-1,500 by FY25), and (4) higher margin construction order book).
Investor briefing at 11:00am NZT / 9:00am AEDT
Conference call – register here:&nbsp;<a href="https://s1.c-conf.com/diamondpass/10019367-534gul.html" target="_blank" rel="noopener">https://s1.c-conf.com/diamondpass/10019367-534gul.html</a> Webcast:&nbsp;<a href="https://edge.media-server.com/mmc/p/qoom4uht" target="_blank" rel="noopener">https://edge.media-server.com/mmc/p/qoom4uht</a>&nbsp;&nbsp;
1H22 result summary
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/257/437/original/image_36696667441644974207991.png?1644974208" class="editor-image img-responsive" data-smartkarma-image-id="257437"></figure>
Source: Forsyth Barr analysis, Company reports

Fletcher Building 1H22 Result – First impressions
Fletcher Building’s (FBU) 1H22 EBIT (before significant items) was NZ$332m, and slightly below our forecast of NZ$340m with the cost of 1Q22 lockdown shutdowns greater than expected. The 1H22 result was boosted by industrial land sales (NZ$47m) and the revaluation of land (NZ$9m) on transfer to FBU’s new retirement living operations (Vivid Living). &nbsp;While 1Q22 was impacted by lockdown shutdowns FBU saw a strong rebound in 2Q22 with EBIT +43% yoy and EBIT margin of 10.2% (excluding land sales) with strong outcomes in building products, concrete, distribution and Australia. The final dividend was slightly below our forecast (18cps vs.&nbsp;19cps) but FBUs balance sheet metrics remained strong with net debt to EBITDA of 0.4x despite a NZ$107m investment in the residential division and NZ$122m inventory rebuild.
FBU has guided to FY22 EBIT of c.NZ$750m before NZ$25-50m of impacts of Omicron in 2H22 (ForBarr NZ$685m and Bloomberg consensus NZ$697m). FBU has also guided to group EBIT margin of 9.5% (excluding land development) and stated it remains firmly on track to deliver its c.10% group EBIT margin target in FY23. The market has been sceptical that FBU would achieve its margin target and the strong 2Q22 run rate and 2H22 guidance should underpin an uplift in medium term consensus expectations. We are OUTPERFORM rated.
Key features of the result:

NZ Core (Building Products, Distribution, and Concrete) EBIT was NZ$211m, down -5% prior year. Building products was impacted by 1Q21 lockdowns but 2Q22 saw a strong recovery with EBIT +62% yoy and EBIT margins of 15.5%. Concrete EBIT of NZ$61m was flat on prior year, with revenue growth and cost disciplines helping to offset inflationary pressures. Distribution EBIT down -5%, however 2Q EBIT margins were 8.5%.
Residential EBIT up +81% on 1H22, albeit this includes an abnormally large industrial development sale of Rocla site for NZ$45m, as well as a NZ$9m internal transfer revaluation gain of Vivid Living. Residential lots sales were -11% yoy but average price was +33%.
Australia revenue and EBIT up +4%. Margins were flat on the prior year albeit 1Q was impacted by lockdowns and 2Q saw margins increase +0.6ppts on 1H22 to 4.1%. Building products EBIT up +14%, Distribution +13%. Steel saw revenue growth, however FBU also called out rapid input cost pressures.
Trading cash flow was impacted by NZ$122m lift in inventory, with FBU calling out c. 40% of 1H22 inventory was a rebuild of stock levels from after FY21 low levels, with the rest due to higher sales volume and higher input prices. Net debt lifted to NZ$442m (year end FY21 NZ$173m) and leverage to 0.4x EBITDA below the target 1.0-2.0x range (FY21 0.2x). NZ$200m remaining of the on market share buyback announced at the May investor day.

Outlook comments
FBU has guided to FY22 EBIT of c.NZ$750m before NZ$25-50m of impacts of Omicron in 2H22 (vs. ForBarr NZ$685m and Bloomberg consensus NZ$697m).
FBU’s medium term outlook expectations includes 1) “stronger for longer” activity in NZ particularly in residential where homebuilder order books are full for the next 12-18 months and consents are running above industry capacity, 2) easing of COVID impacts with no repeat of 1H22 headwinds borders open, skills shortages easing, and 3) investment pipeline to deliver growth beyond FY23 ((1) extra capacity in plasterboard, insulation, panels, (2) expanded low carbon concrete offer, (3) growth in residential development (targeting 1,400-1,500 by FY25), and (4) higher margin construction order book).
Investor briefing at 11:00am NZT / 9:00am AEDT
Conference call – register here:&nbsp;https://s1.c-conf.com/diamondpass/10019367-534gul.html Webcast:&nbsp;https://edge.media-server.com/mmc/p/qoom4uht&nbsp;&nbsp;
1H22 result summary

Source: Forsyth Barr analysis, Company reports

Fletcher Building (FBU.NZ): 1H22 Result Slightly Below Expectations but Solid FY22 Guidance and Margins Tracking to FBU's 10% Target