Monday, November 17, 2008

Fletcher Building down tools in short term

Like any other companies operating in the current market Fletcher Building Ltd [FBU.NZ] is going to find the next 18 months or so very hard.

It has already forecast a much lower profit guidance of $289 million to $354 million for FY 2009, such a wide ranging forecast because of extreme uncertainties in the market in which the company operates.

The domestic housing markets in which it operates in; New Zealand, Australia and the USA are experiencing major downturns and that construction downturn coupled with the associated slowdown in supplies of their building materials to said construction is having a big impact on revenue and of course profit.

In my opinion this is likely to get considerably worse before it gets better and shareholders probably wont be seeing anything positive coming out of these domestic housing markets until well into 2010-well later if governments in those countries make the economy worse.

Having said that there are bright spots for the company.

Fletchers has a long list of major infrastructure projects currently underway, especially in Auckland; with Mount Eden Prison upgrade, the Eden Park redevelopment, the Manukau Harbour Crossing(PDF)and the New Lynn Rail Trench among them and a backlog of other infrastructure work in the wings.

The newly elected National Government have also indicated an emphasis on State funded infrastructure projects to help New Zealand get out of its deep economic funk and hundreds of millions in contracts are bound to come Fletchers way in the next year or so.

Australian and American Governments have also indicated a preference to concentrate on crumbling infrastructure to kick their economies along as well.

All this bodes well for their commercial construction division and also the raw materials that they can supply as the inevitable upturn comes.

A question still remaining is how much negative impact the purchase of the Formica Corporation last year for nearly 1 billion Kiwi dollars will have on company bottom line.

Bought for a premium, the global maker of laminates was already in trouble before it was rescued by Fletcher Building and the company has had some trouble and unforeseen(although it should have been) expense so far in restructuring plants and manufacturing processes in order to make the initial decision to buy a relevant one.

The jury is still out.

Make no mistake, Fletcher Building is one company that will be especially hit hard over the global recession. What it has going in its favour though is good management and a backlog of work to fall back on when other sectors of its business get negatively impacted and once again a good decision by management to diversify the company geographically as well as sectorially have put the company in good stead.

As it was one of the first sectors of the economy-along with the retail sector- to show signs of this current economic slowdown, its eventual emergence from the gloom will be a good indicator that New Zealand is at the beginning of another economic upturn.

**Disclosure: I own FBU Shares


Related Share Investor reading

Why did you buy that stock? [Fletcher Building Ltd]
A solid foundation for the future
Fletcher Building raises profit through canny management
Fletchers got game

Related Links

Fletcher Building Investor Info
Fletcher Building Financials

Click here for full Media Release
FBU 2008 Annual Results



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