New Zealand Professional Investment Services Firm

Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Fletcher Building FY21 Result – First impressions</h2>
Fletcher Building’s (FBU) FY21 EBIT (before significant items) was NZ$669m, slightly above guidance and our expectations. Stronger contributions from Construction and Residential and Development partly offset by lower Distribution were the key variances to our forecasts. The final dividend was slightly below our forecast (18cps vs 22cps) but FBUs balance sheet metrics remained strong with net debt to EBITDA of 0.2x suggesting some conservativism. Over all this is a strong result underpinned by a robust operating backdrop, that said NZ’s current lockdowns add some uncertainty.
Key features of the result:
<ul>
<li>NZ Core (Building Products, Distribution, and Concrete) EBIT was broadly in line with expectations. Building products included solid lifts in Humes and Steel (EBIT NZ$40m) following turn around initiatives. Concrete saw a meaningful EBIT margin increase from 10.0% to 13.3%.</li>
<li>Residential EBIT up +12% on FY19 and +3% ahead of our expectations. Average unit selling price +8% but +20% on a like-for-like basis. Land development slightly ahead of guidance. Targeting 950 units in FY22 with a quarter pre-sold sold.</li>
<li>Australia was subdued at the top line with revenue down -2% but cost out lifted EBIT +34% (on FY19) to NZ$103m (includes depreciation benefit from Rocla being held for sale) and margins +1.5ppts to 3.7%. Pipes businesses revenue -18% on subdued civil market. Management indicated market share gains across most Australian businesses. Rocla divested for A$55m in July.</li>
<li>At its May investor day FBU called out 2H21 cost pressures of NZ$10-15m, however no quantitative mention in FY21 result. Outlook commentary suggest FBU is well placed to recover rising costs through price increases over the near-medium term.</li>
<li>Strong trading cash flow reduced net debt to NZ$173m (year end FY20 NZ$497m) and leverage to 0.2x EBITDA below the target 1.0-2.0x range. No change to NZ$300m on market share buyback announced at the May investor day.</li>
</ul>
Outlook comments
As always no direct guidance was provided with FBU providing an update on trading and outlook at its AGM in October. FBU’s outlook expectations includes 1) “stronger for longer” activity in NZ particularly in residential, 2) Strong detached housing and renovation activity in Australia offset by subdued apartment construction and non-residential stabilising at moderate levels, and 3) input cost inflation and supply chain disruption being offset with price.
While the current NZ lockdowns were not specifically mentioned the length and severity of restrictions in NZ will likely be a key swing factor in FY22 outcomes. Under NZ’s Level 4 restrictions construction activity is halted. Construction activity can resume at Alert Level 3 but with distancing restrictions that reduce activity levels.
Investor briefing at 11:00am NZT / 9:00am AEDT
Conference call – register here:&nbsp;<a href="https://s1.c-conf.com/diamondpass/10014879-537abs2.html" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://s1.c-conf.com/diamondpass/10014879-537abs2.html&amp;source=gmail&amp;ust=1629332788983000&amp;usg=AFQjCNGGqR8-t82TfJkDksq16kJp75omHQ" rel="noopener">https://s1.c-conf.com/diamondpass/10014879-537abs2.html</a>
Webcast:&nbsp;<a href="https://edge.media-server.com/mmc/p/s8c5jndn" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://edge.media-server.com/mmc/p/s8c5jndn&amp;source=gmail&amp;ust=1629332788983000&amp;usg=AFQjCNFDIx3ku-C-qKpN7q0t75sVKBgTCg" rel="noopener">https://edge.media-server.com/mmc/p/s8c5jndn</a>
FY21 result summary
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/224/465/original/image_7030025251629248016370.png?1629248016" class="editor-image img-responsive" data-smartkarma-image-id="224465"></figure>
Source: Forsyth Barr analysis, Company reports

Fletcher Building FY21 Result – First impressions
Fletcher Building’s (FBU) FY21 EBIT (before significant items) was NZ$669m, slightly above guidance and our expectations. Stronger contributions from Construction and Residential and Development partly offset by lower Distribution were the key variances to our forecasts. The final dividend was slightly below our forecast (18cps vs 22cps) but FBUs balance sheet metrics remained strong with net debt to EBITDA of 0.2x suggesting some conservativism. Over all this is a strong result underpinned by a robust operating backdrop, that said NZ’s current lockdowns add some uncertainty.
Key features of the result:

NZ Core (Building Products, Distribution, and Concrete) EBIT was broadly in line with expectations. Building products included solid lifts in Humes and Steel (EBIT NZ$40m) following turn around initiatives. Concrete saw a meaningful EBIT margin increase from 10.0% to 13.3%.
Residential EBIT up +12% on FY19 and +3% ahead of our expectations. Average unit selling price +8% but +20% on a like-for-like basis. Land development slightly ahead of guidance. Targeting 950 units in FY22 with a quarter pre-sold sold.
Australia was subdued at the top line with revenue down -2% but cost out lifted EBIT +34% (on FY19) to NZ$103m (includes depreciation benefit from Rocla being held for sale) and margins +1.5ppts to 3.7%. Pipes businesses revenue -18% on subdued civil market. Management indicated market share gains across most Australian businesses. Rocla divested for A$55m in July.
At its May investor day FBU called out 2H21 cost pressures of NZ$10-15m, however no quantitative mention in FY21 result. Outlook commentary suggest FBU is well placed to recover rising costs through price increases over the near-medium term.
Strong trading cash flow reduced net debt to NZ$173m (year end FY20 NZ$497m) and leverage to 0.2x EBITDA below the target 1.0-2.0x range. No change to NZ$300m on market share buyback announced at the May investor day.

Outlook comments
As always no direct guidance was provided with FBU providing an update on trading and outlook at its AGM in October. FBU’s outlook expectations includes 1) “stronger for longer” activity in NZ particularly in residential, 2) Strong detached housing and renovation activity in Australia offset by subdued apartment construction and non-residential stabilising at moderate levels, and 3) input cost inflation and supply chain disruption being offset with price.
While the current NZ lockdowns were not specifically mentioned the length and severity of restrictions in NZ will likely be a key swing factor in FY22 outcomes. Under NZ’s Level 4 restrictions construction activity is halted. Construction activity can resume at Alert Level 3 but with distancing restrictions that reduce activity levels.
Investor briefing at 11:00am NZT / 9:00am AEDT
Conference call – register here:&nbsp;https://s1.c-conf.com/diamondpass/10014879-537abs2.html
Webcast:&nbsp;https://edge.media-server.com/mmc/p/s8c5jndn
FY21 result summary

Source: Forsyth Barr analysis, Company reports

Fletcher Building: FY21 Result – First Impressions