The construction sector put in a remarkable performance over the second half of last year, despite the upheaval caused by Covid-19.
Ready-mix concrete production data shows construction activity is going from strength to strength, with volumes up by 5 per cent, quarter-on-quarter, and 8 per cent year-on-year in the December quarter.
The second half of 2020 was the strongest on record.
Broker Forsyth Barr expects production will remain near record levels in the first half of this year, given historically high residential consent volumes and improving industry confidence.
“While some of this will be catch-up work from lockdown delays in the June quarter, we expect this is set to continue, given improving construction confidence, a significant increase in construction employment, and anecdotes of a great earthworks season thus far,” the broker said.
Against that background, Fletcher Building put in a strong first half — its net profit rocketing up 48 per cent to $121 million.
For the year, Fletcher sees its earnings before interest and tax (Ebit) — before significant items — being in a range of $610m to $660m.
Describing the outlook, the company said, “current indicators point to core volumes in New Zealand and Australia remaining at present levels through the second half, with robust demand for residential housing in New Zealand.”
Chief executive Ross Taylor and his executive team deserve credit for the company’s much-improved performance, said Castle Point Funds co-founder Richard Stubbs.
“Margin improvement and strong cash generation is particularly welcome, as is the return of the dividend,” Stubbs said.
“A key aspect to watch for will be continued improvement in profitability of their Australian business.”
Earnings top the scale
Fletcher Building’s first-half earnings before interest and tax, at $323m, were above the top end of the guidance range of $305-$320m given in early November.
The company surprised with a first-half dividend of 12 cents per share, having previously indicated that dividends would only restart in the second half.
“A good top-of-expectation result with outlook slightly subdued but in line with expectation,” Jarden said in a report.
However, Australia is a little disappointing, saved only by Fletcher’s cost reduction programme, the broker said.
Fletcher Building’s share price has been on a tear for the past few months, but there was a subdued price reaction after the result was delivered on Wednesday.
“The company delivered an earnings result that was better than expected and a dividend increase that was better than expected, but the market had already allowed for it,” said Harbour Asset Management portfolio manager Shane Solly.
Solly noted that Australian institutions had been active buyers of Fletcher Building shares in the lead-up to the result.
“But it was not ‘better enough’ to keep on firing,” he said.
“We have seen that with a number of stocks that have run hard going into their result, but have not kept on going.”
The next cab off the rank in the construction scene is Steel & Tube, which reports its first-half result next Friday.
The company has already said that it expects to report normalised Ebit of between $6.5m- $7.5m, up from the previous year’s normalised Ebit of $5.7m.
In a December update to the market, Steel & Tube said the positive performance reflected growing market demand, driven in part by the busy residential and infrastructure sectors, which have provided some balance to softening activity on the non-residential construction front.
The company said it had secured a solid pipeline of project work and was well positioned to continue its current performance trends.
Forsyth Barr has upgraded its rating of Contact Energy to “outperform”, despite distortions in the market created by exchange traded fund (ETF) activity.
Contact last week said it would proceed with its Tauhara geothermalproject, north of Taupō, and raised $400m from the market to help fund it.
It also revised its dividend policy, released a “no surprises” first-half result, anda strong January operating report as well.
“In response, we have upgraded our rating to outperform and upgraded near-term forecasts,” Forsyth Barr said.
So what has made the broker change its view?
“Whilst expected ETF selling will likely place short-term downward pressure on Contact’s share price, we view any further weakness as a buying opportunity,” said Forsyth Barr.
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