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 Investor Day Preview: Great Expectations

NEUTRAL
FBU will provide an update on market activity and trading at its investor day on 26 May. The current FY21 EBIT guidance range of NZ$610–660m hinges on volumes in its NZ and Australian construction products divisions. NZ market data remains robust and demand should not be an issue for building materials companies. Also,&nbsp;FBU's&nbsp;domestic manufacturing is likely winning share from imports. Australian activity is picking up but peers have highlighted this will gather pace as consents convert to starts over the coming months. Margins are more opaque&nbsp;with input cost pressure well documented&nbsp;but potentially offset by a better pricing environment. Taken as a whole, we expect FBU to lift FY21 earnings guidance at its investor day, our revised FY21 EBIT estimate is +5% vs. the mid-point of current guidance.​​​​​​​


What's changed?&nbsp;



Earnings:&nbsp;EBIT +5%/+6%/+4% to NZ$668/710/700m
Target price:&nbsp;+6% to NZ$7.20



Market expecting an upgrade


With 2H20 taken ill by the pandemic it is difficult to assess a base level of market volume and EBIT to bridge FY21 guidance. Using 2H19 NZ Core and Australian earnings as a guide, adjusting for IRFS-16 and cost out as well as some minor one-offs, we get 2H21 EBIT of NZ$348m or FY21 EBIT of NZ$671m, verses guidance of NZ$610–660m. Robust NZ demand&nbsp; gives us further confidence in FBU lifting its guidance range. This has not been lost on the share price which has run&nbsp;ahead of consensus EPS forecasts.


Near-term tail winds remain strong


History suggests investors should take a cautious view when evaluating&nbsp;FBU's&nbsp;outlook. However, we see a number of near-term positives that should continue to boost earnings: (1) significant cost base reset, (2) robust NZ residential demand, (3) supply chain disruptions impeding&nbsp;import competition, and (4) high operating leverage exposure to rapidly improving Australian activity.&nbsp;While cost pressures are evident, an&nbsp;improved pricing environment and leverage to stronger volumes should more than offset.&nbsp;


Good for now but has anything structurally changed?


We acknowledge that FBU's headline valuation multiples are not challenging vs. sector peers or an elevated NZ market. However, we believe these need to be considered in the context of NZ construction activity at record levels. While the current environment is conducive to strong operating performance we dont have confidence that the end markets FBU competes in have structurally changed and expect competitive pressures to return, market activity to moderate, and some level of cost reinvestment. NEUTRAL.



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





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Fletcher Building: Investor Day Preview: Great Expectations