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Market re-rates Fletcher Building after quake

The Christchurch earthquake may be just the thing to stir up Fletcher Building's moribund earnings prospects, Forsyth Barr head of research Rob Mercer says. Since the quake, Fletcher Building shares have rallied sharply, closing on Tuesday at $8.15,

NBR Staff
Wed, 08 Sep 2010

The Christchurch earthquake may be just the thing to stir up Fletcher Building’s moribund earnings prospects, Forsyth Barr head of research Rob Mercer says.

 Since the quake, Fletcher Building shares have rallied sharply, closing on Tuesday at $8.15, up 5.8% from Friday’s close.

The cost of rebuilding damaged buildings and infrastructure in Canterbury is expected to be in excess of $2 billion.

Mr Mercer said building companies are operating at low utilisation, so there was scope to deploy labour and resources to help rebuild the city.

As a result of the quake, Forsyth Barr has raised its estimate for the company’s earnings before interest and tax by 11.7% to $669 million for 2010/11 and by 5.2% to $728 million for 2011/12. Mr Mercer has upgraded its recommendation to “buy.”

“The building sector is only operating at about 66% of capacity, therefore there is scope for the industry to accelerate the labour/material resources required to help rebuild the city,” Mr Mercer said in a research note.

The speed of this will be determined by the claims process and decision making with respect to the major projects like water/sewer infrastructure.

The 2010/11was looking like being a tough year for the building sector. “While an improvement in activity would be preferred in another way, the reality is the Christchurch earthquake will bring forward the increase in building activity that was very much needed,” Mr Mercer said.

“With the risk to Fletcher Building’s 2010/11 earnings now to the upside, FBU’s investment fundamentals are improved as we now have a positive outlook for building activity over the next 3–5 years,” Mercer said.

Fletcher Building did not issue an earnings guidance when it released its annual result last month, but it painted a cautious outlook for 2010/11.

The company said then that it expected the residential market to continue a slow and a gradual recovery in new building activity. Commercial construction activity was expected to remain at very low levels throughout 2010-11, the company said at the time.

The Christchurch quake, which measured 7.1 on the Richter scale, was New Zealand’s second largest since the 1931 Hawke’s Bay earthquake.

 

NBR Staff
Wed, 08 Sep 2010
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Market re-rates Fletcher Building after quake
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