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 Time to Build

NEUTRAL
Fletcher Building's (FBU) investor day was informative but does little to change our investment view. Unsurprisingly, (1) the trading environment remains favourable, (2) guidance was lifted (+4% at the midpoint although boosted by higher land sales), and (3) cost pressures have arisen. The announcement of an NZ$300m on-market share buyback, which we expect will be +3% accretive to EPS, was a welcome surprise for shareholders. However, the key upside driver of FBU's share price in the near-term hinges on its ability to achieve its 10% EBIT margin target by FY23 (vs. consensus expectations of 8.5%). FBU expects to meet this goal through an enhanced focus on residential and land development, market share gains, and by entering product adjacencies. Trading on 15.2x forward earnings, we view current levels as broadly fair, particularly given elevated construction activity. NEUTRAL.


What's changed?&nbsp;



Earnings: We have made minor adjustments to our EBIT forecasts (FY21–23E -0.3%/-2.5%/+0.3%) reflecting FBU's guidance on operating cost investment and higher residential sales volumes
Target price:&nbsp;+3% to NZ$7.45



Trading environment remains buoyant


With demand for housing resilient, government stimulus targeting infrastructure, and local manufacturers enjoying share gains at the expense of imports, FBU are operating in a favourable environment. Capacity constraints are beginning to emerge across the industry, and&nbsp;FBU believe this will result in activity being&nbsp;sustained at current strong levels rather than the spike which consents data may suggest. Cost pressures have also emerged, with FBU noting a c.NZ$10–15m impact in 2H21 from supply chain constraints&nbsp;and rising input costs (e.g. energy and steel), however, the brunt of inflationary pressures appear to be being worn by customers. With these dynamics in play, FBU raised FY21 EBIT guidance to NZ$650m–$665m (vs. previous guidance of NZ$610m–NZ$660m).


How likely are 10% EBIT margins in FY23?


FBU outlined ambitions to achieve a 10% EBIT margin target by FY23, underpinned by four key pillars; (1) AU operating disciplines and growth initiatives, (2) Construction forward order book replacing nil margin legacy work, (3) leverage in NZ Core and adjacencies, and (4) strong top-line growth at &gt;15% margin in Residential and Development. The principal new message was the importance of the residential and development division to reaching this target with ambition to build 300 apartments a year (in addition to the 1,000 homes already targeted) as well as 100 retirement units and development of industrial land. We view investment in this strong performing business unit as sensible, although it comes with additional risk given entry into new markets. We do not forecast FBU achieving its FY23 margin goal, with low margin Australia and Construction divisions limiting further expansion.



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

Fletcher Building: Time to Build