Since our last update in June, Fletcher Building (FBU.NZ / FBU.AX) shares continue to power ahead, up another +20%. After trading sideways over the last few years, it seems as though FBU is finally playing catch-up with the rest of the NZ stock market.
The most recent move higher has been driven by a solid annual profit result and positive earnings outlook. FBU’s net earnings before significant items were $ 418 million, 5 per cent higher than the $399 million recorded in the prior year. The result met management’s relatively optimistic targets. Particularly pleasing was a pick up in the Australia business, as over the last few years the Australian side of the business has lagged NZ, and we were looking for signs of NZ success to be mirrored in Australia. Recent moves by both the RBA and RBNZ to begin new rate easing cycles should benefit the construction sectors in both Australia & NZ, and benefit FBU’s business at the margins, in our view. A final dividend of 20 cents per share will be paid on 12 October 2016, with full New Zealand tax credits attached, bringing the total dividend for the year to 39.0 cents per share. In a market where deep value is hard to find, FBU offers both a decent dividend yield and solid earnings growth, in our view.
Overall operating earnings are expected to be between $720m – $760m for 2017, and we believe there is the potential for further earnings upgrades over the next 2 years for FBU, particularly as underperforming divisions turnaround. A final dividend of 20 cents per share will be paid on 12 October 2016, with full New Zealand tax credits attached, bringing the total dividend for the year to 39.0 cents per share.
Undoubtedly compared to a few months ago more of the upside potential is being reflected in FBU’s share price. However, in a market where deep value is hard to find, FBU offers both a decent dividend yield and solid earnings growth. We remain BUY rated FBU shares.
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