Shares in Fletcher Building fell more than 12% yesterday after it sprang a surprise profit downgrade on the market.
Blaming weak construction activity, especially in parts of New Zealand and Australia, the company lowered its first half earnings estimate by 10%.
As a result shares in Fletcher, NZ’s biggest listed company, fell 12.4% to $5.43 at the close, a fall of 76c.
The close was the lowest the shares have been for more than two years.
The shares hit a low in trading of $5.35, down 13.5%.
In New Zealand, the news helped send the market to its biggest one day fall since August.
Fletcher directors said in the statement that the residential and commercial building markets in New Zealand and Australia were "challenging", resulting in lower earnings, while the expected boost from reconstruction in the earthquake-hit city Christchurch was likely to take longer to appear.
"In New Zealand, no material improvement in trading conditions is expected in the first half of the 2012 financial year, and the timing of a sustained and meaningful recovery beyond that is uncertain," the company said in a statement to the market yesterday.
"In Australia, there is a clear risk that residential and commercial construction activity will remain around the current low level for the balance of the 2012 financial year.
"Markets in North America and Europe are expected to remain flat while Asia is expected to continue growth.
"On the basis of the first three months earnings, and factoring in weak residential and commercial construction markets in both New Zealand and Australia, coupled with likely further delays to the rebuilding in Canterbury, Fletcher Building has reviewed its earnings forecasts for the 2012 financial year," the company told the market
It said it now expected first half year profit to fall 10% to around $NZ150 million ($118 million). The company earned $NZ166 million before tax in the first half of the 2010-11 year.
But Fletcher said it expected full year earnings to be in the same range as last year’s $NZ359 million pre-unusual items profit.
The company’s 2010-11 net after tax profit for the year to June 2011 was $NZ283 million.
The forecast is actually worse than it seems because this year will see the full contribution from the takeover of Crane Group at a cost of $A800 billion.
Crane was bought at the start of 2011, so there was only a small contribution in the second half of the year.
Crane made a profit of $A70 million in 2011 and the result in the first half should have been a lot better because there was no contribution from Crane in the December half of last year.
So in effect Fletcher has paid a lot of money to earn less! In other words Fletcher has destroyed value, around half a billion or so dollars, judging by the size of yesterday’s share price fall.
Therefore the result from Fletcher’s existing businesses is worse than it seems, while Crane has clearly been crunched as well by the sluggish Australian home building and commercial construction sectors.
Fletcher’s detailed comments on Australia and NZ made the problems in the home building and construction sectors clear, but not in infrastructure which seems to be going well.
"While there has been a modest uplift in residential housing consents in recent months, this has yet to flow through to activity levels.
"Even after factoring in the improved trend in consents, the number of new housing starts remains at historically low levels.
"Consequently, group businesses exposed to the residential and commercial markets in New Zealand have recorded lower earnings than for the corresponding period in the prior year.
"Infrastructure activity has remained steady and this has underpinned earnings in businesses exposed to this part of the market.
"In Australia, the significant downturn in residential consents and continued weak approval levels in commercial construction have impacted the earnings performance of businesses in those sectors.
"In particular, Laminex’s earnings have been negatively impacted, due to both the high exposure of the business to the residential sector and its sensitivity to volume changes. However, those group businesses serving the infrastructure sector in Australia are continuing to perform satisfactorily.
"Conditions in the long steel industry remain difficult with surplus capacity globally coupled with the high Australian dollar adversely impacting earnings from the export of long steel product into Australia.
"Formica has continued to see earnings growth in each of its three regions – North America, Europe and Asia – with on-going growth in Asian markets, and cost reduction initiatives in Europe and North America underpinning generally flat market conditions there.
"The pace of reconstruction efforts in Canterbury was expected to accelerate in the second half of the 2012 financial year, assuming a continuing reduction in seismic activity. However, the region experienced a further magnitude 5.5 earthquake on Sunday 9 October which the government believes could further delay rebuilding efforts.
"New Zealand Treasury expectations are that the rebuilding in Canterbury will not "begin in earnest" until the second half of the 2012 calendar year."
