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Fletcher performance shows building products not all plain sailing as Carter mulls IPO

07 Apr 2015

Fletcher Building's shares missed out on the rally in New Zealand shares in the past five years and Graeme Hart's Carter Holt Harvey will face similar pressures if it returns to public ownership this year, investors say.

The two companies compete in New Zealand's crowded building products distribution market with their Placemakers and Carters Building Supplies outlets, and both manufacture building products on both sides of the Tasman. Hart is reportedly considering selling 70 percent of Carter Holt in an initial public offering, having acquired it as a much larger group in 2006 for $3.6 billion and set about selling assets ranging from forestry, to farms, to pulp and paper.

Credit Suisse First Boston banker Rob Stewart is advising Hart and both Credit Suisse and local affiliate First NZ Capital are involved in a potential IPO, according to media reports. New Zealand's richest man has been looking across all of his portfolio of investments with a view to selling down assets, including a strategic review by his Reynolds Group Holdings of its Evergreen, Closures and SIG units last year. The selldown of Carter Holt, one of Australasia's largest suppliers of wood products, could reap some A$1 billion, according to Australian reports.

"There are pluses and minuses in that space," said James Lindsay, a portfolio manager at Nikko Asset Management. "There's a reasonably buoyant housing market in New Zealand but also competition in retailing and the product side as well. Imported product is putting pressure on prices."

Carter has about 50 building supply stores in New Zealand to Fletcher's 58 Placemakers outlets. They also compete with Bunnings, Mitre 10 and ITM. In the first half, Fletcher recorded an 8 percent gain in sales from New Zealand distribution, which also includes its Mico outlets, and 5 percent earnings growth. But that was driven mainly by "operational efficiencies and category mix changes", while "competitive pressures capped margins." Australian distribution sales fell 6 percent and earnings were down 25 percent, primarily on the sale of its Hudson Building Supplies business.

Carter Holt's other two divisions are Woodproducts New Zealand and Woodproducts Australia. According to information published in The Australian, it is the market leader in Australasia for timber, engineered wood products and structural plywood. It is ranked first in Australia for MDF, particle board and flooring and second in those products in New Zealand to Fletcher.

The company doesn't publish details of its financial performance. Japanese investors led by Oji Holdings last year acquired the company's pulp, paper and packaging businesses for $1.04 billion in a deal approved by the Commerce Commission in August.

Fletcher Building's shares have fallen 1.7 percent in the past five years, while the NZX 50 Index has soared 76 percent. The $5.8 billion company is rated a 'hold' based on the consensus of 10 analysts polled by Reuters.

"It's a tough business - Fletcher will admit that quite readily," said Mark Lister, head of private wealth research at Craigs Investment Partners. "Some of the issues are specific to them - buying the Crane Group in Australia for a very high price and some operational issues have not been great. But a lot of it is just to do with the industry - it is cutthroat and tough."

"In Australia it is pretty difficult at the moment and not showing signs of improvement," he said. Still, investors look at prospective IPOs on a case by case basis "and if it priced appropriately, the investors will be there."

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