##{"id":58918,"date":"2011-09-29T13:43:29","date_gmt":"2011-09-29T03:43:29","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2011\/09\/29\/fletcher-to-struggle-with-crane\/"},"modified":"2011-09-29T13:43:29","modified_gmt":"2011-09-29T03:43:29","slug":"fletcher-to-struggle-with-crane","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2011\/09\/29\/fletcher-to-struggle-with-crane\/","title":{"rendered":"Fletcher To Struggle With Crane"},"content":{"rendered":"

\n\t– Analysts visit Crane Group assets of Fletcher Building
\n\t– Integration going to plan but macro conditions have weakened
\n\t– Potential for expected target timetable to slip<\/strong>
\n\t <\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tHaving recently acquired Crane Group, Fletcher Building ((FBU<\/span>)) has held a site tour for broking<\/span> analysts that has offered some additional insights into how the new assets are fitting into the group.<\/p>\n

\n\tIn the view of BA Merrill Lynch the integration of Crane Group has to date gone smoothly. This implies synergy benefits are being realised<\/span>, Citi<\/span> noting total annual realised<\/span> synergies across the Corporate and Group Procurement operations are estimated at $16.6 million. Citi<\/span> sees potential for further benefits to be achieved.<\/p>\n

\n\tAt the time of the acquisition management at Fletcher Building had set a target of 15% return on funds employed from the Crane Group assets, to be achieved by FY16<\/span>. The site visit saw this target reiterated, as Deutsche Bank notes management are positive on the upside potential of the new businesses.<\/p>\n

\n\tIncreased earnings from the Pipelines and Tradelink<\/span> businesses are expected to drive the achievement of this target, though Citi<\/span> sees scope for some slippage in timing terms given macro conditions have worsened since the Crane Group assets were acquired.<\/p>\n

\n\tAs an example, Citi<\/span> points out margin recovery in the Trade Distribution business is largely volume dependent. This is driven to a significant extent by residential and commercial construction levels, where the shorter-term outlook remains less than favourable<\/span>. This will be offset to some extent by new supply contracts won in the Queensland Coal Seam Gas market.<\/p>\n

\n\tAccording to BA-ML, the significant macro headwinds<\/span> currently in place suggest Fletcher Building is unlikely to generate cost of capital returns from the Crane Group assets for at least the next four years. On BA-ML's numbers the assets need generate EBIT (earnings before interest and tax) of $129 million to meet the cost of capital, which compares to the $71 million achieved in FY11<\/span>.<\/p>\n

\n\tAllowing for the tough market conditions, BA-ML remains of the view Fletcher Building shares offer reasonable value at current levels given an earnings multiple of 13 times for FY12<\/span> and a solid balance sheet. <\/p>\n

\n\tWhat drives the Neutral rating of BA-ML is a belief any recovery in building activity in Australia and New Zealand is unlikely before FY13<\/span>. As well, the fact the New Zealand assets appear to have reached a terminal market position suggests it will be the Australian market where any organic growth occurs.<\/p>\n

\n\tDeutsche agrees with BA-ML and rates Fletcher Building as a Hold on valuation grounds. Citi<\/span> is more positive and retains a Buy rating on Fletcher Building, a share price target of NZ$9.35 implying an expected share price return of almost 24% relative to current trading levels. <\/p>\n

\n\tOverall the FNArena<\/span> database shows brokers are evenly split on Fletcher Building, with four Buy ratings and four Hold recommendations. The consensus price target according to the database is $6.80, unchanged from prior to the update.<\/p>\n

\n\tShares in Fletcher Building today are weaker and as at 1.00pm<\/span> the stock was down 7c<\/span> at $5.95. Over the past year Fletcher Building has traded in a range of $5.62 to $7.11. The current share price implies upside of around 14% to the consensus price target in the FNArena<\/span> database.<\/p>\n

\n\t <\/p>\n

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