Fletcher Building Earnings: Cyclical Challenges Drag Down Sales, but Recovery Is on the Horizon

We maintain our NZD 6.00 (AUD 5.50) per share fair value estimate for no-moat Fletcher Building FBU and consider the stock undervalued. Underlying fiscal 2023 EBIT rose 6% to NZD 798 million, in line with our expectations. Although sales disappointed, coming in 6% below our forecast, the group EBIT margin of 9.4% was stronger than we had anticipated, a solid outcome given the cyclical challenges facing the New Zealand and Australia construction sectors.

Fletcher Building declared a fully imputed, but unfranked, final dividend of NZD 0.16 per share, bringing the total fiscal 2023 dividend to NZD 0.34 —15% below fiscal 2022. The dividend payout ratio fell to 64% from 73% in fiscal 2022, management’s justification being the increase in cash outflows related to the New Zealand International Convention Centre, or NZICC, project. After reassessing NZICC costs and insurance recoveries, Fletcher Building increased expected cash outflows by NZD 105 million, lifting total forecast net outflows related to construction legacy projects to NZD 275 million in fiscal 2024 and 2025. However, as these legacy projects move into the rearview mirror, we expect a midcycle payout of 63%, consistent with management’s longer-term target of 50% to 75%.

Resilience in Fletcher Building’s materials and distribution divisions, which includes building products, distribution, concrete, and the Australia segments, was the driving force behind higher EBIT margins at the group level. In particular, the Australia business, which accounts for 21% of group EBIT, showed significant improvement in fiscal 2023. The margin expanded materially to 6% from 4% last year, as price discipline offset cost inflation of major inputs, including steel, resin, freight, and labor.