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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Fletcher Building<br>FY20 Pre-announced — Some More One-Offs</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Fletcher Building (FBU) has pre-announced its FY20 result, with underlying EBIT of NZ$310m, and one-off adjustments leading to a net loss of NZ$196m. This is a slight improvement on FBU's May update, however, given the consistent anecdotes of strong post-lockdown construction activity we suspected it might have been higher. We anticipate activity and FBU's revenue will remain solid near-term (assuming no more significant lockdowns) but fade as current projects are completed and the pipeline empties through CY21. The risk is this downturn is not only cyclical but leads to a further erosion in the business's underlying quality. Whilst FBU's share price remains down sharply from pre COVID-19 levels, it's not at a level where we see clear value. ​​​​​​​FBU will report its FY20 result in full on 19 August 2020. We lower our target price -10cps to NZ$3.70 and maintain our NEUTRAL rating.&nbsp;</p>
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<h3>Robust post&nbsp;lockdown&nbsp;activity in NZ but not consistent across divisions</h3>
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<p>FBU has pre announced its FY20 result with underlying EBIT of NZ$310m but an NPAT loss of NZ$196m due to further construction provisions of NZ$150m and impairments of NZ$276m. This is a slight improvement on FBU's May update which implied FY20 underlying EBIT of c.NZ$275–300m (cf. 1H20 NZ$219m/FY19 NZ$549m excl. Formica). We expect NZ residential focussed divisions have likely performed well post lockdown but anticipate an impact on (1) Residential, given the inability to sell over key April/May months (and therefore settle before FY20 year end), (2) Steel, given competitive pressures, and (3) Australia, which was in the middle of executing turnaround initiatives when the pandemic struck.</p>
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<h3>Right sizing for a sharp downturn ahead</h3>
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<p>FBU has reset its cost base through workforce reduction, ceasing unproductive product lines, and the closure of facilities and offices. FBU expects that this will lead to c.NZ$300m of annual cost savings, beginning in FY21. FBU believes this cost-out positions the business for a 25% decline in NZ activity and 20% in Australia. Our modelling assumes costs reduce with volumes, however, we are not confident we'll see net benefits to shareholders. Historically, extensive cost savings initiatives have been more than offset by competition and cost pressures.&nbsp;</p>
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<h3>Risk remains that COVID causes further underlying deterioration in FBU's business</h3>
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<p>There remains risk both around the magnitude of the downturn, and more significantly, of further underlying deterioration in FBU's businesses. Competition may continue (or compound) margin pressures. Falling demand exacerbates the challenges of executing on turnaround initiatives. And a pullback in capex may starve the business of necessary investment. Our concern is FBU may emerge from the downturn weaker than when it went in.</p>
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<div><strong>Rohan Koreman-Smit CFA</strong></div>
<div><a href="mailto:rohan.koreman-smit@forsythbarr.co.nz" target="_blank" rel="noopener">rohan.koreman-smit@<wbr>forsythbarr.co.nz</a></div>
<div>+64 9 368 0085</div>
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<div><strong>Ashton Olds</strong></div>
<div><a href="mailto:ashton.olds@forsythbarr.co.nz" target="_blank" rel="noopener">ashton.olds@forsythbarr.co.nz</a></div>
<div>+64 9 368 0127</div>
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Fletcher Building FY20 Pre-announced — Some More One-Offs

NEUTRAL
Fletcher Building (FBU) has pre-announced its FY20 result, with underlying EBIT of NZ$310m, and one-off adjustments leading to a net loss of NZ$196m. This is a slight improvement on FBU's May update, however, given the consistent anecdotes of strong post-lockdown construction activity we suspected it might have been higher. We anticipate activity and FBU's revenue will remain solid near-term (assuming no more significant lockdowns) but fade as current projects are completed and the pipeline empties through CY21. The risk is this downturn is not only cyclical but leads to a further erosion in the business's underlying quality. Whilst FBU's share price remains down sharply from pre COVID-19 levels, it's not at a level where we see clear value. ​​​​​​​FBU will report its FY20 result in full on 19 August 2020. We lower our target price -10cps to NZ$3.70 and maintain our NEUTRAL rating.&nbsp;


Robust post&nbsp;lockdown&nbsp;activity in NZ but not consistent across divisions


FBU has pre announced its FY20 result with underlying EBIT of NZ$310m but an NPAT loss of NZ$196m due to further construction provisions of NZ$150m and impairments of NZ$276m. This is a slight improvement on FBU's May update which implied FY20 underlying EBIT of c.NZ$275–300m (cf. 1H20 NZ$219m/FY19 NZ$549m excl. Formica). We expect NZ residential focussed divisions have likely performed well post lockdown but anticipate an impact on (1) Residential, given the inability to sell over key April/May months (and therefore settle before FY20 year end), (2) Steel, given competitive pressures, and (3) Australia, which was in the middle of executing turnaround initiatives when the pandemic struck.


Right sizing for a sharp downturn ahead


FBU has reset its cost base through workforce reduction, ceasing unproductive product lines, and the closure of facilities and offices. FBU expects that this will lead to c.NZ$300m of annual cost savings, beginning in FY21. FBU believes this cost-out positions the business for a 25% decline in NZ activity and 20% in Australia. Our modelling assumes costs reduce with volumes, however, we are not confident we'll see net benefits to shareholders. Historically, extensive cost savings initiatives have been more than offset by competition and cost pressures.&nbsp;


Risk remains that COVID causes further underlying deterioration in FBU's business


There remains risk both around the magnitude of the downturn, and more significantly, of further underlying deterioration in FBU's businesses. Competition may continue (or compound) margin pressures. Falling demand exacerbates the challenges of executing on turnaround initiatives. And a pullback in capex may starve the business of necessary investment. Our concern is FBU may emerge from the downturn weaker than when it went in.



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: FY20 Pre-Announced — Some More One-Offs