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Fletcher Building Limited(FBU)

Team Veye | 22 Sep 2020 ASX - FBU
Fletcher Building Limited(FBU)
Call Buy
Investment Duration Long Term
Asx FBU

Fletcher Building Limited (ASX: FBU) is a holding company. The Company is involved in the manufacturing and distribution of building materials, and residential and commercial construction. Its segments include Building Products, International, Distribution, Residential and Land Development, and Construction. The Building Products segment is a manufacturer, distributor and marketer of building products used both commercially and in residential markets. The International segment includes laminates and panels businesses that manufacture and distribute decorative surface laminates. The Distribution segment consists of building, plumbing, pipeline and steel distribution businesses in Australia and New Zealand. The Residential and Land Development segment develops land holdings for both residential and commercial use, and is a residential home builder. The Construction segment includes Fletcher Construction, a general contractor in New Zealand and the South Pacific (Profile source: Reuters)

From the Company Reports

Fletcher Building confirms FY20 annual results

Fletcher Building Limited (ASX: FBU) on 19 August 2020 announced its audited annual results, confirming a net earnings loss for the year ended 30 June 2020 (FY20) of $196 million compared to a profit of $164 million in the year ended 30 June 2019 (FY19). The Group also confirmed strong operating cash flows of $410 million and ended the year with a strong balance sheet with the liquidity of $1.6 billion.

(Chart source: TradingView)

Summary: 

  • Final results in line with the market announcement of 11 August 2020 
  • Revenue of $7,309 million 
  • EBIT before significant items $160 million 
  • Net Loss After Tax of $196 million, compared to a profit of $164 million in FY19 
  • Strong cash flows of $410 million 
  • Balance sheet strong with the liquidity of $1.6 billion and net debt of $0.5 billion 
  • Nil dividend

 

Fletcher Building CEO Ross Taylor said that Fletcher Building’s FY20 performance was characterised by the impacts of COVID-19 and the actions it took to ensure that the Company was well positioned to successfully navigate the market uncertainty in FY21 and beyond. Prior to March 2020, the business was trading in line with expectations and making good progress with operating efficiencies. The subsequent lockdown in New Zealand and restrictions in Australia had a significant impact on its FY20 revenues and profitability.

Its focus through this period has been on three key areas: the health and safety of its people; enhancing the resilience of its business by managing the costs, cash flows and balance sheet; and ensuring it stays focused on strong customer performance and delivering on strategy.

Anticipating lower market activity ahead, Fletcher has taken some difficult but decisive actions to reset the cost base of the business. It expects these actions to deliver a permanent reduction in its cost base in FY21 of approximately $300 million per annum. Significant items in respect of this restructuring, along with one-off charges in its Rocla business and from the early repayment of its USPP debt, have totalled $276 million in FY20. Fletcher has sized its business for a market downturn of around 25 percent in New Zealand and around 20 percent in Australia, although there is a high degree of uncertainty over the outlook. The Company will be looking hard at the trends in activity over the next few months and will be ready to adapt and respond if needed.

 

(Graphic Source – Company Reports)

Fletcher Building repayment of USPP notes

Fletcher Building on 30 June 2020 announced its intention to make an early repayment of US$300 million of USPP notes.

CEO Ross Taylor said that the USPP notes, which were issued in 2012 and due to mature in 2022 and 2024, were the Company’s most expensive source of debt, with an average cost of funding of 5.4%. Repayment of the notes would reduce the Company’s funding costs by cNZ$17 million per year, whilst still leaving the Company with significant liquidity of cNZ$1.1 billion.

The repayment will be made in late July from the Company’s cash reserves. This transaction does not affect the Company’s 2016 USPP notes, which have a significantly lower cost of funding and provide longer-term tenor in the Company’s debt facilities, with maturity dates in 2026 and 2028.

Fletcher Building update on banking agreements

Fletcher Building on 10 June 2020 announced amendments to its banking agreements which will enable the Company to rely on more favourable terms for covenant testing through to the end of 2021 if required.

CEO Ross Taylor said that given the impact COVID-19 was likely to have on the New Zealand and Australian markets, the Company was taking pre-emptive steps to reinforce its resilience for the medium-term.

The Company has a robust balance sheet position, with c$1.5 billion liquidity and a leverage ratio of c0.8 times, below the Group’s target range of 1.0-2.0 times. It believes its current balance sheet sets it up well for the period ahead. That said it was also taking steps beyond this to ensure it will be well placed to negotiate the uncertain trading environment ahead, these include the reset of its cost base announced in May, and now the agreements it had reached with its lenders providing additional headroom on its lending covenants should it need it.

 

(Graphic Source – Company Reports)

Fletcher Building update on trading and organisation reset

Fletcher Building on 20 May 2020 provided an update on trading and measures it is taking to respond to the impact of COVID-19 on the Group, including a proposal to reduce the number of people it employs.

Trading update 

As outlined in the update provided on 25 March, the Group’s businesses had until then traded largely in line with expectations. However, with no revenue across most of its New Zealand operations during the Level 4 lockdown and Australia revenues running at around 90% of preCOVID-19 expectations, the Group recorded an operating EBIT loss for April (unaudited and prior to significant items) of c$55 million. The result consisted of a c$55 million loss in New Zealand and an approximately breakeven result in Australia. Costs incurred during this period relate mainly to employee costs, with c90% of New Zealand employees placed on the Group’s Bridging Pay Programme. This ensured its employees who were not working received at least 80% of their base pay for the first four weeks, and a minimum of 50% for the subsequent four weeks.

 

Fletcher Building Limited (ASX: FBU)
Stock Overview
Sector Materials
Risk Medium
Market Cap $2.85 billion
Share Volume 824.26 million
EPS (FY) -$0.220
PE RATIO -
Yearly Dividend Yield  6.05%
Target Price (s) T1 $4.75 T2 $6.00
Stop Loss $3.05
Recommendation Buy
52 weeks High $5.510
52 weeks Low $2.820
Managing Director Mr Ross Taylor
Non Executive Directors Mr Martin Brydon
Ms Barbara Chapman

 

Veye’s Take

Fletcher decided to raise a further $150 million provisions against its historical construction projects. Fletcher Construction, through a reset of bid margins and disciplines now has a $2.4 billion forward-order book of new work with a materially better margin outlook and lower-risk profile. Its operating cash flows in FY20 have remained robust at $410 million, supported by effective working capital management in a disrupted period. The Company has also preserved strong liquidity and funding lines. Its leverage ratio remains below the bottom end of its target range, have total available funding of $2.1 billion as at 30 June 2020, and liquidity for the Group was $1.6 billion. In addition, it pre-emptively renegotiated covenants with its lenders to enable it to rely on more favourable terms for covenant testing through to the end of 2021, should it need to. As a result of the actions it has taken, Fletcher’s business was well-positioned to continue to drive its strategy and performance improvement. With its strong balance sheet, it expects the tougher market will present better opportunities to achieve its aspirations and overall strategies. FBU is expected to become profitable in the next 3 years. FBU’s short term assets (NZ$3.8B) exceed its short term liabilities (NZ$2.4B). FBU’s short term assets (NZ$3.8B) exceed its long term liabilities (NZ$2.9B). The Company’s debt to equity ratio has reduced from 52.7% to 50.7% over the past 5 years. Its debt is well covered by operating cash flow (22.9%). The stock, after being in a downtrend for quite some time, has made a base just near $3.0 from where it is staging a recovery. Daily indicators have already turned bullish. It can have the potential of growing strongly in the medium term. Veye recommends a "Buy" on “Fletcher Building Limited” at the current price of $3.50


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