Morningstar | No-Moat Fletcher Sells Formica Business & Confirms Dividend in Fiscal 2019; FVE Increased 3%. See Updated Analyst Note from 17 Dec 2018
We’re positive on no-moat Fletcher’s sale of its Formica business, with the deal adding approximately 5% to our fair value estimate. The sale represents a central component of Fletcher’s strategy to refocus on its core markets of New Zealand and Australia. Struck at a price of USD 840 million, the deal remains subject to regulatory approvals but Fletcher expects completion by year-end fiscal 2019. Fletcher also confirmed it would pay a first-half dividend but that in resuming dividends in fiscal 2019, they would be weighted towards the second half when we believe a sizable return of capital will be announced. Taking today’s announced sale together with the previously announced sale of the Roof Tile Group, which has a marginal negative valuation impact, we increase our fair value estimate by 3% to NZD 6.70 per share (AUD 6.30 per share). Despite the positive stock price movement following today’s announcement, Fletcher shares continue to screen as cheap, trading at 0.78 times our fair value estimate.The two divestments will net Fletcher NZD 1.28 billion and provides for significant balance sheet flexibility. With the company targeting net debt/EBITDA in the range of 1.5–2.0 times, the return of substantial capital to shareholders is imminent in our view, either in the form of a special dividend or share buyback. However, we await guidance from Fletcher on timing and the mode of capital return before factoring into dividend or gearing estimates, noting that either form of capital return is pretax valuation neutral. We now forecast a five-year sales CAGR of negative 4.0%, down from a prior negative 0.4%, reflecting lost Formica sales in combination with our unchanged expectations for softening residential construction markets in New Zealand and Australia. We expect EBIT margins of 7.3% over the same period, largely unchanged from our prior forecast.
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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