Fletcher posts $305m profit, sees 'stronger for longer' building activity

Wednesday, 18 August 2021

Fletcher Building says the New Zealand construction market is expected to be ‘stronger for longer’, especially for the residential sector.

Fletcher Building, the country’s biggest construction firm, expects to see an extended period of “solid building activity” in the year ahead and beyond.

The building company reported a $305 million profit for the year ended June 30. That’s a turnaround from the previous year when it posted a $196m loss after it restructured its business to lower its cost base, reducing staff, products and facilities as it downsized to be able to cope with disruptions caused by Covid-19.

The construction industry is running hot, with consents for buildings at record highs amid a shortage of housing. The increased demand is putting pressure on the availability of building materials and labour, which are already in short supply due to disruptions caused by the Covid-19 pandemic.

“As we look ahead, we believe that the economic trends in our key markets remain supportive for further growth,” said chief executive Ross Taylor.

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The company is seeing strong residential demand across both new builds and renovations, supported by an historic undersupply and a favourable macroeconomic environment of low unemployment and low interest rates.

Taylor said supply chain and labour constraints mean the residential sector is currently at or near capacity, which is likely to mean an extended period of building activity beyond the current financial year.

“In New Zealand, the activity pipeline continues to look ‘stronger for longer,’ especially in the residential sector,” Taylor said. “With ongoing supply chain and labour constraints having the effect of smoothing the recent sharp rises in building consents over a longer period, this is likely to mean an extended period of solid building activity.”

Fletcher Building chief executive Ross Taylor expects an extended period of “solid building activity”.

Fletcher posted an operating profit of $669m, ahead of its forecast for $650m to $665m.

The company’s profit margin lifted to 8.2 per cent in the latest year, from 2.2 per cent in 2020 and 7.2 per cent in 2019. It attributed the gain to efficiency programmes and targeted investments in growth. The company is targeting a profit margin of about 10 per cent in its 2023 financial year.

Shares in Fletcher Building lifted 1.4 per cent to $7.86 following the result. The stock has gained 134 per cent over the past year.

Fletcher is the country’s largest integrated manufacturer and distributor of building supplies. Its building products unit lifted pre-tax earnings to $197m from $87m in 2020 and $167m in 2019.

Building products revenue rose 19 per cent to $1.4 billion amid strong demand from residential and infrastructure sectors and market share gains. The company said it had improved its pricing disciplines with escalating electricity, freight and raw material input cost increases passed on in the second half of its financial year.

The company’s residential and development business sold 836 units, up from 666 units the previous year, with the average unit price 8 per cent higher. Revenue rose 58 per cent to $734m due to a strong market driven by low mortgage rates and a combination of new and well-established development locations.

The construction division returned to profit, posting pre-tax earnings of $31m, following a loss of $147m in 2020. The firm has narrowed its focus to lower risk projects with better margins after being burnt on big construction projects in the past.

Taylor said it was hard to gauge the impact of the latest Covid-19 level 4 lockdown which started on Wednesday.

“It does have an impact, but it’s just too hard to define yet,” he said. “A short, sharp lockdown will be obviously less than if it is extended.”

Fletcher has about 9000 employees and while some could work from home, most would be stood down, he said.

“The ultimate impact will depend on how long it takes to get the virus under control,” he said.

Fletcher has been using its strong cashflow to pay down debt, reducing net debt to $173m, from $497m in 2020 and $218m in 2019.

The company will pay shareholders a final dividend of 18 cents per share, taking the full-year dividend to 30c. It didn’t pay dividends in 2020 to preserve funds as part of an agreement with its lenders as construction projects were impacted by Covid-19 lockdowns. It paid a 23c dividend in 2019.

The latest profit includes writedowns of $128m, with $47m related to the final phase of an Australian restructuring programme, and $81m due to a writedown of its Australian Rocla concrete business which it sold for A$55m (NZ$56.5m) after the end of its financial year.