Directors of Australia's two largest building and construction supply companies Boral Limited (ASX: BLD) and Fletcher Building Limited (ASX: FBU) are struggling with the question "Can we fix it?" as the cyclical downturn in the sector takes hold and profits drop. But rather than a loud chorus of "Yes we can" in reply, both companies announced plans for redundancies to cut costs as the decrease in demand for their products drags on.
Boral announced a fall in group EBIT of 28%, or $77m, to $200m at their announcement on Wednesday, while Fletcher Building's EBIT, excluding recently acquired pipe producer Crane, dropped by 20%. A similar story for building product manufacturer CSR Limited (ASX: CSR) who presented a 26% drop in EBIT to investors in their full year result back in June.
All three companies have suffered from the lower domestic demand in Australia. It's easy to notice fewer cranes on our city skylines, but less visible is the number of new homes being constructed, or older homes being renovated, where the building companies' products are used.
The only company to buck the trend so far has been fibre cement product maker James Hardie Industries (ASX JHX), who recently announced a first quarter net profit increase of 11% after tax. The company put the rise down to lower input costs (particularly pulp) and an increase in home building construction in USA and Europe, however issued a cautionary note saying "the broader US housing industry contends with continuing tight credit conditions, excess inventories, low levels of consumer confidence and elevated levels of unemployment." Not exactly confidence inspiring!
Gradual industry recovery is being tipped over the long-term as housing activity picks up in Australia and America and borrowers make the most of current low interest rates, but that may be little comfort to current investors.
Foolish Takeaway
The question being asked by management in the building industry shouldn't be "Can we fix it?", but rather; "How can we sustain and grow our product margins during this tough period, and how can we prepare ourselves to pounce when things start to improve?". Right now James Hardie appears to be the closest to an answer.
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Motley Fool contributor Regan Pearson owns shares in Fletcher Building. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
