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 Make Hay While the Sun Shines

NEUTRAL
Fletcher Building (FBU) provided a strong 4M21 trading update with EBIT up +54% as resilient construction activity and a reset cost base translated to strong earnings growth. Management remains cautious on the medium term given limited order book visibility beyond early CY21. However, we expect NZ residential to remain robust underpinned by low&nbsp;interest rates and tight supply. While the level of cost out evident in 4M21 was encouraging, prior initiatives have not resulted in sustained margin improvement. 1H21 guidance will be provided at the AGM on 25 November. We remain NEUTRAL, with near term momentum tempered by medium term macro uncertainty, persistant competitive pressures and execution risks.


What's changed?&nbsp;



EBIT:&nbsp;Up +27.2%/+35.7%/+32.5% in FY21/22/23
Target price:&nbsp;Lifted to NZ$5.60
Rating:&nbsp;NEUTRAL rating retained



Robust NZ activity and cost out underpin strong start to the year


The four months, ended 31 October 2020, has seen construction activity remain robust vs. the gloomy scenario FBU outlined as its base case in August. Despite flattish group revenue (+1%) FBU's EBIT was up +54% on the pcp, principally due to a cost base which was resized in anticipation of lower volumes that haven't yet materialised. Revenues/EBIT in the NZ Core were up +4%/+30%, with the Concrete and Building Products divisions showing particular strength. FBU's residential division delivered 342 units of its 700–800 unit FY21 target, however, further upside beyond this target is unlikely given stock constraints. Australian EBIT was up +65% on falling revenues -6%, with FBU reaping the benefits of recent (and prior) restructuring initiatives (as well as lower depreciation with Rocla being held for sale).


Excitement tempered by uncertainty and track record


While it is encouraging to see FBU participate in the construction sectors post lockdown bounce, the activity outlook remains uncertain. FBU's forward order book is strong but only extends into early CY21, and with the non-residential pipeline thinning on both sides of the Tasman, FBU remains cautious on where 2H21 activity will land. Our thinking on FBU's earnings track (albeit from a higher base) remains unchanged; a solid FY21 supported by a robust operating environment that tempers in FY22 as activity slows and competitive pressures see FBU give back 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$5.60, 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: Make Hay While the Sun Shines