Morningstar | No-Moat Fletcher Building Lowers Fiscal 2019 Guidance; FVE Unchanged and Shares Attractive
No-moat Fletcher Building has lowered its fiscal 2019 EBIT guidance, reflecting tougher-than-anticipated conditions within its Australian businesses. Fletcher now expects EBIT in the range of NZD 630 million to NZD 680 million in fiscal 2019, with the midpoint of the updated guidance range 6.5% below prior guidance provided in August 2018. While the New Zealand business is tracking Fletcher’s expectations, input costs are pressuring margins in Australia while volumes are also soft given falling residential construction activity. While our top-line forecasts are unaffected, we now expect EBIT of NZD 658 million in fiscal 2019 reflecting EBIT margins of 7.0%, down from our prior expectation of 7.6%. Nonetheless, our long-term outlook for Fletcher is unchanged, and our fair value estimate of NZD 6.50 per share (AUD 5.90 per share) remains intact. Following the market’s negative reaction to the downgrade, value has emerged as shares trade at a 24% discount to fair value.Contraction in Australian residential approval numbers in the first quarter of fiscal 2019 have impacted Australian sales volumes, particularly the Stramit, Laminex, and Tradelink businesses. We already anticipate lower Australian construction activity near term and continue to expect total housing approvals to fall by 5.5% in fiscal 2019. With our sales volume expectations unchanged, we continue to forecast a 10-year top-line CAGR of 2.1%.
Margins have been impacted so far in fiscal 2019 by continued input cost pressures, particularly energy and resin prices--a continuation from fiscal 2018. But we expect long-term margins to be driven higher by tighter cost control, operating leverage in the distribution division, and a higher mix of infrastructure projects relative to commercial projects, toward a midcycle level of just over 9%. Meanwhile, residential consents in New Zealand are tracking our expectations, at an approximate annual figure of 30,000 compared with our forecast for 30,100 consents.
Fletcher Building is a holding company. Through its subsidiaries, Co. operates in six divisions: Heavy Building Products, which manufactures, distributes and markets heavy construction material; Light Building Products, which manufactures a range of building products for residential and commercial markets; Laminates and Panels, which manufactures and distributes decorative surface laminates; Distribution New Zealand and Distribution Australia, which consist of building, plumbing, pipeline and steel distribution businesses in Australia and New Zealand; and Construction, which is a general contractor in New Zealand and the South Pacific and a builder of residential homes in New Zealand.
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