Fletchers’ is a well run shop, but Residential underpins all that they do. And I can’t get past the NZ housing market at this stage of the cycle.

The heavy capex program, and cashflow drag from provisions, means FCF will remain pressured, and gearing will rise. The balance sheet is fine, but if they step it up to say ~2x into a downturn (that is worse than they anticipate) and you’ve got a situation like what Adbri found themselves in, e.g. Kwinana (a big project) eating all the FCF, gearing getting to worrying levels, work to be done not getting done, and a share price crunch.

The strong recent gains (for ABC) are only just climbing out of a deep hole (that they dug!).

So, whilst FBU is fine for a high risk high reward strategy, we don’t think now is the time for more defensively configured portfolios.

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