Broker predicts $66OM profit for Fletcher’s

Press, 11 September 1989, Page 29

Broker predicts $66OM profit for Fletcher’s

Jordan Sandman Were, Auckland-based sharebrokers, are predicting Fletcher Challenge will announce a total profit of $660 million on Wednesday.

This would be an increase of 24 per cent on last year’s result. The research report on New Zealand’s largest company predicts a group net profit of S6SIM, an 8% increase on last year. The major points of the review are:

• The cyclical nature of Fletcher Challenge’s markets puts the company in a period of low earnings per share growth with the 1989/90 forecast only 5% up on the predicted 65.7 c for the latest year. Last year it was 67.3 c.

• Newsprint prices are dipping, and pricing momentum of other papers had slowed. Forestry earnings through to 1991-93 were unlikely to be higher than the cur-

rent year, predicted at $457M profit (25.4% up).

• Lower earnings on newsprint prices will be offset by capacity increases, cost efficiency, and buoyant pulp markets. Also product and sector diversification give Fletcher a more stable profit stream than for pure forest product companies. • The New Zealand economy is at a cyclical low, with growth forecast to return this year. Fletcher was in a position to benefit from any improvement because of interests in building materials, construction, agribusiness, and forestry. • The acquisition of Petrocorp (on a priceearnings ratio of 7.6) coincided with strengthening methanol and oil prices. Although methanol prices had eased, oil and condensate production had increased 50% since 1986-87.

• The company is con-

solidating after acquiring Petrocorp, Winstone, and British Columbia Forest Products. The balance sheet is improving rapidly and target gearing levels should be restored by December, or even earlier. Fletcher will then have the option of using cash balances aggressively — a SIOOOM cash acquisition or expansion is feasible late 1989 while conforming to target gearing ratios. Jordan Sandman Were take the investment view of hold or buy on weakness for Fletcher. Although Fletcher was close to fully priced in the short-term, the share price gave reasonable value long term.

Some share price volatility could be expected with price changes on commodity-grade forest products. Any weakness should provide good entry points. Fletcher’s price/earnings is well below the

United States and New Zealand market averages, but this reflected low earnings growth in pulp and paper. Share price growth required either expansion of the price/earnings multiple or earnings growth from other sectors, particularly in New Zealand.

The potential for price/ earnings expansion was limited, while United States forestry stocks trade near their widest historical discount to the market.

More likely, growth for Fletcher will come from any economic recovery in New Zealand, and the company’s successful record in acquisitions.

“Historically, Fletcher Challenge has achieved major growth through timely acquisitions. Forecast cash flows will permit a major acquisition after June, 1989,” the report states.