Fletcher Building – nailing it

• Today, Fletcher Building is dual listed on the New Zealand and Australian stock exchanges and operates six divisions
• 
  Almost half of Fletcher Building’s New Zealand revenues (which equates to about 30% of the group overall) are derived from residential housing
• 
  While the company has done a good job of refocusing the business, there are many external factors outside of its control

Fletcher Building traces its origins back to 1908, when James Fletcher arrived in Dunedin from Scotland with a bag of tools and a few pounds in his pocket. The following year, James and a partner won a contract to construct a house outside Dunedin. The wooden villa (pictured below, left), still stands today.

The company has expanded over the decades. With this growth came more sizeable projects, including Chateau Tongariro (pictured below, right), Auckland University Clock Tower, Wellington Railway Station, and the Christchurch to Lyttelton tunnel.

Today, it is dual listed on the New Zealand and Australian stock exchanges and operates six divisions:

Building Products

Fletcher Building provides a vast range of market leading products to the wider building industry. These can be separated into three key segments – products (Winstone Wallboards, Laminex, and Tasman Insulation), pipes (concrete and plastic) and steel (roofing, wire products, reinforcing steel).

Many of us will be familiar with some of the major brands in this division, including GIB, Pink Bats, and Formica. Less familiar products include electrical conduit, gas and plumbing pipes, roofing iron, rain guttering, highway barriers, road lamp posts, and electric vehicle charging products.

Distribution

As the name suggests, this segment is focused on the distribution of building supplies across the domestic market (using its network of around 140 physical locations), particularly to trade customers.

The key brands in this division include PlaceMakers and Mico, with the around 80% of end customers from this division operating in the residential housing market.

Concrete

Fletcher Building’s concrete division covers the full value chain, and has the only in-country cement manufacturing facility (located in Northland). Concrete and related products are at the core of almost every residential and industrial building project.

Fletcher Building’s business in this segment include Golden Bay Cement, Winstone Aggregates, and Firth. Having a range of businesses within this division allows Fletcher Building to target specific sub-segments of the building industry.

Residential and development

In addition to providing a range of building products to the broader construction industry, Fletcher Building also has its own development arm. This division is focused on around Auckland and Christchurch, with projects aimed to deliver master planned community developments, with efficiencies in design and cost coming from its sheer scale.

The company has a sizeable landbank which can support the construction of more than 1,000 homes annually for a number of years. Fletcher Building targets land sites which can support at least 100 homes, focusing on mid-market housing, with the Government and iwi acting as a partner in certain cases.

Construction

The three key brands in this division are Fletcher Construction (large transport projects), Brian Perry Civil (ground and marine engineering), and Higgins (a roading specialist with long-term maintenance contracts). The division has almost $3.0bn of work in its current order book, with a large part of this coming from contracts with stable customers. Some of these include Auckland Transport, Watercare, Waka Kotahi, and Auckland Airport.

Australia

The Australian division offers a range of products including kitchen solutions, pipes, insulation, bathroom products, and steel sheeting for interior and exterior solutions. More than 60% of end market exposure is residential, about 30% is commercial and the balance is infrastructure.

Summary

Almost half of Fletcher Building’s New Zealand revenues (which equates to about 30% of the group overall) are derived from residential housing. House prices have been very strong in recent years, fuelled by low interest rates. Higher prices tend to drive more renovation work, which increases demand for Fletcher Building’s products. The volume of sales has also been strong, which provides further catalysts for improvements being undertaken.

Over the past few months, we have seen signs of house price growth and sales volumes moderating. The market remains robust, and the supply/demand imbalance is still positive for a company like Fletcher Building. However, further rises in mortgage rates could see a sharper slowdown in the housing market, and the tailwind of recent years could subside.

Improving operating performance, despite COVID-19 challenges, has allowed Fletcher Building to return to paying dividends, undertake share buybacks and invest in growth opportunities.

Fletcher Building is leveraged to the housing and construction cycle. Most divisions are driven by activity across the sector and to a lesser degree, house prices. While the company has done a good job of refocusing the business, there are many external factors outside of its control which can have a significant impact on its profitability.

This is an excerpt of an article first published in the April 2022 edition of News & Views. Craigs Investment Partners clients can view the latest edition of News & Views, which includes the full version of this article, by logging in to Client Portal.