This morning, home builder and building products company Fletcher Building Limited (ASX: FBU) provided a market update on trading conditions in the wake of COVID-19.
The Fletcher Building share price is down more than 3% at the time of writing, however, its commentary on the outlook for the Australian building market may be of more interest to many investors.
For those unfamiliar with the company, Fletcher Building is an S&P/ASX 200 Index (ASX: XJO) share that operates across the entire building supply chain – from raw materials right through to construction. It's headquartered in New Zealand and is dual-listed on the NZX.
What did Fletcher Building announce?
This morning, Fletcher Building disclosed that it generated virtually zero revenue from its New Zealand operations during the country's level 4 restrictions. These restrictions began in late March and remained in place through to late April. On a more positive note, revenue from its Australian business ran at around 90% of pre-COVID-19 expectations.
While Australia at least managed to break even, Fletcher Building's New Zealand operations reported an operating earnings before interest and tax loss of NZ$55 million for April.
Since New Zealand made the move to level 3 on 28 April, conditions have been improving. The company's New Zealand businesses are trading at around 80% of forecasted revenues in May. Australia continues to trade at around 90% of pre-COVID-19 expectations.
Bracing for impact
Commenting on COVID-19 and its impact on Fletcher Building's markets in New Zealand and Australia, CEO Ross Taylor said:
While there is a lot of uncertainty over the economic outlook, we expect COVID-19 will lead to a sharp downturn in FY21 and potentially beyond. Looking to the next financial year, we are planning for an environment that will see a shrinking economy, substantially reduced customer demand across all our businesses and sustained lower levels of productivity.
As a result, the company will look to reduce its workforce by approximately 10% – around 1,000 positions in New Zealand and 500 in Australia – in order to get ahead of the anticipated slump in construction activity.
According to Mr Taylor, prior to COVID-19, residential approvals in Australia had been showing signs of renewed growth from a base of around 150,000. However, the company now expects approvals to fall by a further 15% to 129,000 in FY20.
In addition, Fletcher Building is factoring in a 15% decline in the value of commercial work put in place in FY21 due to a reduced project pipeline in the private sector. Meanwhile, it also expects a 10% drop in infrastructure spending as new projects take time to ramp-up.
What does this mean for ASX construction shares?
On the whole, Fletcher Building's market outlook certainly paints a bleak picture of the near-term state of our economy and housing market. It's also a warning to other ASX construction and building products shares like Boral Limited (ASX: BLD), CSR Limited (ASX: CSR), and Adelaide Brighton Ltd (ASX: ABC).
Recently, Boral reported subdued concrete volumes and revenue for the 4 months ended April 2020. Meanwhile, CSR released its full-year FY19 results last week and assured investors it is monitoring lead indicators to allow for an adjustment in production and cost profile as early as possible.
In any case, a shrinking economy and significant pullback in construction activity will put pressure on the share prices of ASX construction shares until the sector shows sustained signs of improvement.
Fletcher Building's decision to reduce its workforce also serves as a reminder that while thousands of jobs were saved at the height of the pandemic, they can still be lost during the recovery phase.
