Company Overview: Fletcher Building Limited (ASX: FBU) is involved in the manufacturing and distributing building materials and residential and commercial construction that creates communities, improves productivity, and contributes to the quality of life for people in regions across New Zealand, Australia, and the South Pacific. The company is listed both on the NZX and ASX and has six main operating divisions, namely (1) Building Products, (2) Distribution, (3) Concrete, (4) Residential and Development, (5) Construction, and (6) Australia.

FBU Details

Buy-Back of Shares & Enhancing Shareholder’s value Aids FBU: The company delivered robust 1HFY22 performance, thanks to the improved operational performance and cost disciplines measures, which are now embedded across the business. FBU achieved these numbers despite the continuous impacts from the COVID-19 lockdowns and ongoing supply chain and inflationary challenges.

Spotlight on 1HFY22 Results:

• Increase in Revenues: In 1HFY22, the company’s revenues went up 2% year over year and came in at NZ$4,064 million. The growth was aided as the businesses achieved share gains in target segments. Notably, revenues from Building and, Construction segment increased 9% and 11%, respectively, on a year over year basis.
• Profits & EBIT Details: Net profit after tax stood at $171 million in 1HFY22, up 41% on a year over year basis. EBIT (before significant items) came in at NZ$332 million, up 3% from the prior corresponding period. EBIT margins stood at 8.2% in 1HFY222, up from 8.1% in 1HFY21. FBU is increasing investment in its New Zealand materials and distribution divisions and driving product and market growth, and accelerating e-commerce and digital activities.
• Dividend Distribution: The company has a decent track record of rewarding shareholders through dividends. Supported by its decent net cash position, strong liquidity, and improved cash flow, FBU declared an interim dividend of 18 cents per share, payable on 7 April 2022.
• Buy-Back of Share: The company’s on-market share buyback programme remains on track. Announced on 26 May 2021, FBU’s buyback program comprises up to NZ$300 million over the 12 months to May 2022. As at 31 December 2021, the company purchased 11.88 million shares for a value consideration of NZ$83 million.
• Growth in Cash Receipts & Cash Inflows: The company recorded $4,062 million cash receipts during 1HFY22 vs $3,968 million in 1HFY21. FBU generated $157 million cash inflows from operating activities in 1HFY22 compared to $424 million last corresponding year. This depicts declined investments to rebuild stock in key areas and housing investment.

Key Trend; Analysis by Kalkine Group

Key Metrics: For 1HFY22, FBU reported a gross margin of 29%, up from 28.8% in comparable 1HFY21. Net margin during the same time span stood at 4.1%, up from the year-ago period of 3.1%.

Profitability Profile (Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form around 21.53% of the total shareholding, while the top four constitute the maximum holding. The Vanguard Group, Inc. held the maximum number of shares with a percentage holding of 3.87%, followed by Schroder Investment Management (Australia) Ltd. holding 3.59%, as also highlighted in the chart below: 

(Analysis by Kalkine Group)

Dividend Track Record:

The company has a decent track record of rewarding shareholders through dividends. FBU paid a 1HFY22 dividend of NZ 18 cents per share, up from NZ 12 cents per share in 1HFY21. This signifies a 50% increase on a year over year basis. At a CMP of $5.97, the company’s annual dividend yield stood at ~5.32%.

Dividend History (Source: Analysis by kalkine Group)

Key Risks: The company is exposed to the risk of adverse economic conditions triggered by the COVID-19 pandemic. Further continuation of the pandemic and its adverse economic repercussions could substantially hurt its businesses as well as results and financial condition. It is also prone to increase governmental as well as regulatory scrutiny. FBU is exposed to performance risks, mainly related to its ability to meet market guidance, deliver superior risk-adjusted performance relative to industry benchmarks, and complete developments in line with expectations.

Outlook: The company’s activity pipeline remains strong in New Zealand and Australia. It is expected to experience a bounce-back in market demand due to ease in government restrictions. The company has a decent balance sheet and remain well-placed to drive ongoing performance and growth. For 2HFY22, group EBIT margins are expected to be ~9.5%, an uplift of 230 basis points compared to the same period last year. For FY22, EBIT is expected to be approximately NZ$750 million. The company also remains confident and expects to deliver a further improvement to profitability averaging 10% EBIT margins for FY23.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company went down by ~12.3% in the past six months. The stock has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount as compared to its peers, considering the impact from COVID-19 outbreak, foreign currency fluctuation risks, changes in government regulations, etc. For the purpose of valuation, peers such as Adbri Ltd (ASX: ABC), CIMIC Group Ltd (ASX: CIM), NRW Holdings Ltd (ASX: NWH) have been considered. Considering rise in profits, enhancing shareholder’s value, rise in cash flow from operations, higher revenue base, decent long-term outlook, pipeline development in FY22, and indicative upside in valuation, we recommend a ‘Buy’ rating on the stock at the current market price of A$5.97, as on 10 March 2022, ~10:30 AM (GMT+10), Sydney, Eastern Australia.  Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

FBU Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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