UPDATE 1-Fletcher issues grim outlook for Australia building sector

Tue Feb 19, 2013 8:46pm EST

* Fletcher pessimistic on Australia market through 2014

* Shares fall nearly 6 pct on outlook, H1 profits

* Cost-cutting to boost earnings by NZ$70 mln per year

WELLINGTON, Feb 20 (Reuters) - Fletcher Building, Australasia's biggest maker of building products, issued a grim outlook for the Australian construction sector and reported weaker half-year profits than analysts had expected, sending its shares to a one-month low.

The news underscores how Fletcher continues to struggle in Australia, which accounts for almost half of its revenue, because of a moribund housing market that has hurt demand for its building products including laminates and insulation.

Net profit edged up 1 percent to NZ$146 million ($123.60 million) in its financial first half that ended Dec. 31, Fletcher said on Wednesday, below the average forecast for NZ$151.1 million in a Reuters poll of four analysts.

In the Australian market, Fletcher said its adjusted operating earnings before interest and tax (EBIT) had fallen 12 percent from a year earlier to NZ$106 million.

"In Australia, the downturn in residential consents and continued weak approval levels in commercial construction are likely to mean that volumes remain weak," Chief Executive Officer Mark Adamson told reporters.

"We're rapidly developing the view that it is unlikely there will be an improvement in the first six months of the next fiscal year," he said.

Shares of the New Zealand company fell 6 percent to NZ$8.75 after the results announcement.

"They're not seeing any market improvement coming through the Australian market in the near term," said Rickey Ward, head of equities at Tyndall Investment Management, adding that this had taken investors by surprise.

Fletcher earns 47 percent of its revenue in Australia, 41 percent in New Zealand, and 12 percent from Asia, Europe and the United States.

While the Australian market would continue to provide headwinds, Fletcher reaffirmed its EBIT forecast of NZ$560 million to NZ$610 million in the financial year ending in June.

Cost-cutting measures will help lift earnings down the line, Adamson said, adding that its new programme would not be slash-and-burn or see large-scale plant closures, but would see hundreds of jobs lost over time in New Zealand and Australia.

"We talked with the analyst community about a number around the NZ$70 million mark in terms of long-term sustainable improvement in earnings," he said, referring to the effect of cost-cutting. "We expect ... to get some improvement in 2014, but principally in 2015/16."

A pick-up in reconstruction activity in the earthquake-devastated Canterbury region boosted the company's domestic operating earnings by roughly 30 percent to NZ$124 million in the July-December half.

Fletcher is spearheading reconstruction in Christchurch and the surrounding region after two devastating earthquakes in 2010 and 2011.

Fletcher reported an interim dividend of 17 cents per share, unchanged from a year earlier. (Reporting by Naomi Tajitsu; Editing by Chris Gallagher)