FBU/Fletcher Building

The FBU (Fletcher Building, big building materials company, and resi home builder in NZ company) AGM and trading update is out. The actual trading conditions are fairly straightforwardly negative, even as management strike an optimistic tone.

They note NZ materials is slightly behind expectations (driven by NZ Resi building materials); the Australian building materials segment is tracking broadly in line, but construction is seeing project slippage.

In NZ Resi development (e.g. building of homes) they see green shoots, but are still “weighted to the second half” club.

Now earnings for S124 had already rebased from the S123 estimate, so today’s update should be broadly ballpark (at the least, not a major surprise).

Expectations for the next 18 months are correspondingly quite modest. So there’s a reasonable chance much of the above is “priced in”.

We think FBU a solid high-risk high reward play. We think there is a shortage of homes, globally, but especially in NZ and Australia, and thus building material companies, and resi home builders, should have strong demand for years as these supply shortages are addressed.

The issue is a) the rates cycle, which is against all of them, and b) those that have debt, or are seeing debt levels rise. FBU is expressly expecting gearing to rise.

That gearing will rise because of cash outflows as the legacy problem projects roll-off.

And so that holds us back from adding FBU in to our flagship Aussie shares direct sleeve. We do have indirect exposures via some of our active managers (e.g. Allan Gray has a position, IML concentrated does not).

The additional idiosyncratic issue of the WA housing pipe leaks is another overhang, which will simply take time to resolve.

So we will just watch, for now, with interest. When they are past the cash outflow hump, I think we will be more inclined, for our lower-risk strategies.

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