Fletcher Building [NZX: FBU] shares touched their lowest levels in more than five years after the company's first-half results, which were clouded by losses at its Building + Interiors unit but also showed soggy demand at its most profitable businesses over the next 12 months. The stock recently traded down 2 percent at $6.72, having sunk as low as $6.50 after the results.
The $273 million loss for the six months ended December compares with a $187 million net profit in the same six months a year earlier and follows its B&I unit posted an operating loss of $631 million as previously forecast by the company last week.
Fletcher says an extra $29 million of overhead and transition costs are expected for B+I in the second half, taking the unit’s total annual loss to the $660 million figure reported last week.
The construction and building materials company says revenue in the six months was up 6% to $4.9 billion and that, excluding B+I’s losses, operating earnings were down 13% from the year-earlier six months at $309 million.
“Outside the challenges experienced in B+I, the broader Fletcher Building business continues to perform to guidance,” chief executive Ross Taylor says.
“While it is pleasing to see an increase in sales revenues, operating earnings have decreased due to lower profits in the construction division, outside of B+I, as well as the building products division,” he says.
“In the Infrastructure and South Pacific businesses of our construction division, we are rolling off major projects from the 2017 financial year, and we are only in the early stages of new ones.
“In building products, we have seen gross margins compress as a result of higher input costs and costs associated with increasing supply chain capacity to meet increased demand.”
The building products division lifted gross revenue 13% but operating earnings fell 9% to $118 million.
“This was driven by additional costs incurred by various businesses to alleviate capacity constraints, increased energy costs, one-off redundancy costs in Fletcher Insulation Australia and a fire at Humes’ Penrose site.”
Earnings in the international division were largely flat while the distribution and residential operations continued to post strong growth.
“Following a record performance in full-year 2017, the distribution division remained a standout, with gross revenues increasing 7% to $1.76 billion and operating earnings up 6% to $89 million,” Mr Taylor says.
The distribution division continues to benefit from strong momentum across its PlaceMakers, Mico and steel distribution businesses while the turnaround of Tradelink is progressing to plan, he says.
Growth supported, but limited
The residential and land development division posted gross revenue of $236 million, up from $163 million in the previous first half, while operating earnings rose 57% to $47 million.
Growth was supported by an increase in unit and land development sales, Mr Taylor says.
The international division increased gross revenues 4%, with strong performances from Formica and robust Laminex sales across the eastern seaboard of Australia but operating earnings were “consistent” with the previous first half at $69 million.
Fletcher Building reiterated its expectation that 2018 financial year group operating earnings excluding B+I will be between $680-720 million.
Commenting on the market outlook, Mr Taylor says residential, commercial and infrastructure activity levels across Fletcher Building’s core markets of New Zealand and Australia are in line with expectations. Growth in activity in the second half is expected to be limited, particularly with the New Zealand building sector operating at or near capacity.
“In New Zealand, residential consents are up 3% and, while there has been some softening of house price growth, we believe this is a sign of the market normalising,” Mr Taylor says.
“In Australia residential activity is declining but standalone approvals remain resilient. Growth in the infrastructure and commercial sectors remains robust in all states outside Western Australia.”
As announced last week, Fletcher will pay no first-half dividend.
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