Fletcher Under Pressure Due to Falling Australian Residential Market

Residential builder Fletcher has announced to investors that it is experiencing financial and margin pressure as a result of the housing market downturn.

Fletcher Building recently broke the news at a presentation to its Australian investors in Sydney. Though New Zealand-based, the company gets around a third of its revenue from its Australian operations.

Fletcher is not expected to benefit from an upturn in the Australian housing market until 2021.

In the presentation, Fletcher gave a modest profit growth forecast for 2020, and predicted that the weakening of the Australia residential market would continue in the coming months.

Fletcher Building shares fell on the update, down 3.3 per cent to $4.92, but they did go up slightly during the session. The company’s S&P / ASX 200 fell by 0.26 per cent.

Prior to the investor presentation, Swiss multinational investment banking company UBS stated that Fletcher’s reiteration of the earnings guidance would be “well received”.

Fletcher lowered its guidance in June and sold its subsidiary, surfacing products company Formica. This led to predictions that earnings would be between AU$592 and AU$621 million before interest and tax.

As New Zealand’s biggest and most prominent builder, Fletcher announced that the turnaround was worse than expected due to the falling Australian residential market in addition to poor discipline in certain areas.

“Australian businesses are most exposed to the residential building sector,” said a spokesman for Fletcher. “[The residential building sector] is in decline and expected to come off 30 per cent from fiscal year 2018 to fiscal year 2020, before returning to growth in 2021.”

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The weakening of the Australian dollar has contributed to the price margin and pressure in the residential building sector, which is not just in its decline but still highly competitive.

Residential market conditions remain good in New Zealand but are expected to dip slightly in 2020. By contrast, the forecast for the Australian housing market remains unclear, while overall market conditions for Australian construction remain static.

Back on home soil, Fletcher boasts a strong market position across its various markets, but its earnings have gone down since steel prices became more competitive. It also suffered financially from the failure of a cement mill.

The company has also made public that it intends to return capital to shareholders of up to $AU287 via an on-market share buyback. Fletcher hopes to commence the buyback in August, after releasing its full year of results.

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