Fletcher Building first-half profit underpinned by building products, distribution

UPDATED: Fletcher Building [NZX: FBU], the listed building supplies and construction group, posted a 51 percent gain in first-half profit, with growth in its newly aligned building products and distribution units making up for weaker earnings from Formica and New Zealand housing developments.

Fletcher shares rose 2 percent to $6.99 after the company reported net profit of $172 million, meeting analyst expectations, for the six months ended Dec. 31, on a 2 percent gain in revenue to $4.4 billion. The company also affirmed guidance for full-year of earnings before interest, tax and significant items of $650 million to $690 million, from $653 million last year, excluding a gain on the sale of Rocla Quarry Products. Its interim dividend of 19 cents is up from 18 cents a year earlier, beating expectations.

Earnings in the latest six months included a $10 million gain related to the sale of Rocla Quarries assets, while the rest of the $85 million profit from the sale will be booked in the second half. At the same time last year it took $66 million in impairments and costs to close manufacturing plants in Australia.

Fletcher this month announced it had reorganised into five divisions and reported first-half results on that basis. It has been shedding unprofitable assets to focus on businesses where it has a dominant position, acquiring Higgins Group Holdings, New Zealand's third-largest road construction and maintenance company, for $315 million. The Higgins deal settles at the end of June. Separately today it announced a joint venture with National Aluminium, or Nalco, folding its aluminium assets into the JV and closing its own manufacturing plant in Auckland within 18 months.

The building products division made the biggest contribution to first-half earnings, led by building materials such as wallboard and insulation, and increased cement volumes in New Zealand. The division lifted operating earnings by 65 percent to $142 million, as revenue fell 4 percent to $1.27 billion. Earnings included one-time gains of $10 million, compared to $28 million of charges a year earlier.

Distribution division earnings jumped 88 percent to $64 million, although excluding year-earlier charges the gain was a more modest 14 percent, on a 1 percent revenue gain to $1.67 billion. NZ building supplies led the gains, thanks to increased earnings from both the Placemakers chain and Mico outlets. By contrast, Australian building supplies recorded a $2 million loss, reflecting restructuring costs and the lack of contribution from Hudson Building Supplies, which was sold. NZ steel distribution lifted earnings by 13 percent, while Australian steel distribution recorded a 67 percent gain.

The international division, which holds the Laminex, Formica and roof tile businesses, recorded a 13 percent decline in earnings to $53 million, driven by a 70 percent decline to $6 million for Formica, while Laminex lifted earnings by 11 percent to $41 million and roof tiles had a 50 percent gain to $6 million.

Earnings from the residential and land development division fell 27 percent to $24 million, mainly reflecting reduced home sales at its Stonefields development. Sales rose 7 percent to $108 million and the company said it plans to ramp up development of a number of Auckland sites in the next few years, and add to work in Christchurch.

Construction division earnings rose 20 percent to $36 million, as revenue rose 17 percent to $748 million, and was inflated by year-earlier charges of $16 million. Excluding one-time items, earnings fell 22 percent. The business had a record $3.3 billion backlog of contracted work as at Dec. 31 and said the decline in earnings in the first half mainly reflected the timing of major projects. It has won contracts including the New Zealand International Convention Centre, the international terminal upgrade at Auckland International Airport, and government contracts including the Waikato Expressway.

"The current strong market conditions in the New Zealand construction industry are expected to persist through the 2016 financial year, with ongoing demand for new housing particularly in Auckland and surrounding provinces," the company said. It also sees "an increase in commercial construction activity off the back of the significant increase in the value of consents, and government expenditure on infrastructure to remain at the present healthy levels."

By contrast, the outlook for Australia remains mixed, residential and commercial construction activity levels in North America would continue at the same levels as in the past year, while Europe was still faced with a generally weak economic outlook. Growth is seen in Southeast Asia but market conditions in China "remain highly competitive."

(BusinessDesk)