Results: Fletcher Building Limited (Australia) (ASX: FBU) shares gained on Wednesday after the New Zealand-based building materials supplier reported an 11% increase in net profits before significant items to NZ$362 million. The earnings growth was driven by a solid rise in the firm's NZ operations and an improvement in the Australian division in the second half which contributed around 27% of the group's earnings.
There was also a corresponding 11% increase in earnings per share and a 6% increase in the dividend to NZ 36 cents per share.
Sector Outlook: Building material suppliers and home building firms have been an area of focus for many investors over the past 18 months given the upswing in demand for housing which has occurred. In NZ residential consents are up 24% to their highest level since 2007 and tracking above their long-run average. Meanwhile in Australia, residential consents are up 21% with multi-unit dwellings driving the gains.
Fletcher's profit growth confirms the view of many investors that companies exposed to the building cycle are set to benefit over the coming quarters. Enthusiasm for exposure to building material companies has led to Fletcher gaining 13.5% in the past year, while Boral Limited (ASX: BLD) has gained 21% and CSR Limited (ASX: CSR) a massive 57%.
Buy, Hold or Sell: There would appear to still be some way to run in the current housing construction cycle. Home sale prices are at record levels and there would appear to not only be pent up demand for housing but also the economics of building as opposed to buying are becoming increasingly attractive.
The question for investors is whether the future earnings upswing is already fully reflected in the price of building material stocks. Given Fletcher only gained 1.1% after releasing its result and with a guidance statement that painted a mixed picture for the firm's outlook, arguably the share price of Fletcher (but also possibly its peers too) already reflects fair value.
