Company Overview: Fletcher Building Limited (NZX: FBU) is primarily 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 operating divisions, namely (1) Building Products, (2) Distribution, (3) Concrete, (4) Residential and Development, (5) Construction, and (6) Australia.

FBU Details

FBU Rides on Decent Financial & Operational Performance:  Despite economic uncertainties, FBU has depicted various trails to offer robust earnings and remains on track to continue its growth trajectory via geographical expansion, robust financial and non-financial metric performance. The company also plans to reduce carbon by ~30% by 2030, thus creating a safe, healthy, and sustainable committee.

Key Discoveries from FY21 Results:

• Rise in Revenues: In FY21, the company’s revenues soared from $7,309 million reported in FY20 to $8,120 million, depicting an increase of 11% year over year. The growth was aided as the businesses achieved share gains in target segments. Notably, revenues from Building and, Residential and Development segment increased 19% and 58%, respectively, on a year over year basis.
• Turnaround in Profits: Net earnings attributable to shareholders stood at $305 million in FY21, compared to a loss of $196 million reported in FY20. Earnings per share for the period came in at 37 cents against a loss of 23.5 cents reported in FY20. The company remains on track by buoyant market conditions and completing the turnarounds of its Australian and Construction businesses, driving decarbonisation, and accelerating e-commerce and digital activities.
• Enhancing Shareholder’s Value: 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 in FY21, FBU declared a final dividend of 18 cents per share, paid on 17 September 2021. Combined with the interim dividend of 12 cents per share, this brings the total dividend to 30 cents per share in FY21.
• Buy-Back of Share: In June 2021, FBU initiated an on-market share buyback of up to $300 million to enhance its shareholder’s value. As at 30 June 2021, the company purchased 3.1 million shares for a value consideration of $24 million.
• Rise in EBIT: In FY21, the company’s EBIT came in at $669 million, up significantly from $160 million in FY20. The EBIT margins stood at 8.2% in FY21, an uplift from only 2.2% in FY20. Notably, return on funds employed (ROFE) increased to 18.6%, compared to 3.7% reported in FY20.
• Growth in Cash Receipts & Cash Inflows: The company recorded $7,927 million cash receipts during FY21 vs $7,512 million in FY20. FBU generated $889 million cash inflows from operating activities in FY21 compared to $410 million last year, owing to effective management of working capital. The company has also targeted investments in inventories to manage supply chain disruptions to support overall industry liquidity.

Key Financial & Operational Summary; Analysis by Kalkine Group

Key Metrics: For FY21, the company reported an EBITDA margin of 12.5%, higher than the year-ago figure of 7.2%. In FY21, the company recorded ROE of 8.4% compared to the year-ago figure of -5.1%

Profitability & Liquidity Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 21.93% of the total shareholdings, while the top 4 constitutes the maximum holding. Perpetual Investment Management Limited held the maximum number of shares with a percentage holding of 4.93%, followed by The Vanguard Group, Inc. holding 3.82%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: The company is exposed to the threats of the COVID-19 Pandemic, which might adversely impact customer demand across all the businesses. The company is also exposed to the risks related to unexpected changes in equity and debt markets. 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. Further, foreign currency fluctuation risks, and changes in government regulations might hinder the company’s business model.

Outlook: Despite some tremors felt by the company in 1QFY22, FBU’s activity pipeline remains strong in New Zealand and Australia. The company 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. FBU expect the EBIT margin to be c.10% in FY23 and remains confident of achieving decent progress in 2HFY22. The company expects to report 1HFY22 results in February 2022.

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: In response to the market downturn, the company expects to reduce its spending and implement cost-saving measures to maintain liquidity. The stock of the company went down by ~3.39% 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 premium 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 Reliance Worldwide Corporation Ltd (ASX: RWC), XRF Scientific Ltd (ASX: XRF), Austin Engineering Ltd (ASX: ANG) and others have been considered. Considering turnaround in profits, enhancing shareholder’s value, rise in cash flow from operations, higher revenue base, decent outlook, pipeline development in FY22, and indicative upside in valuation, we recommend a ‘Buy’ rating on the stock at the current market price of $7.1, as on 2 November 2021, 11:30 AM (GMT+10), Sydney, Eastern Australia.

FBU Daily Technical Chart, Data Source: REFINITIV 

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

Note 2: Investment decision 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 Valuation has been achieved and subject to the factors discussed above. 

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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