Platinum Equity Crunching the Numbers, page-2

And this was the same reporter's excellent article on some analysts' break-up value calculations of some of Fletcher's businesses from back in early March. Keep in mind this was before the latest downgrade (so might reduce some business valuations a little), however equally the share price was at $3.86 back then - so near 30% drop in EV is completely over the top for 5-10% short-term reduction in earnings in couple of their businesses. Makes the case even more compelling for someone taking a tilt at Fletcher at this SP. They may want to see how Iplex plays out first before making a complete T/O, but sure some might start building a 5% position in anticipation and so ready to strike when the time is right...

Analysts run the numbers on Fletcher Building break-up

By BRIDGET CARTER

DATAROOM EDITOR

MARCH 6, 2024

Jarden analysts have run the numbers on a break up of Fletcher Building and believe that if it was boiled down to four core units, it could sell non-core assets for $NZ3.1bn – almost its current market value.

Based on the company’s disappointing performance, Jarden advocates for a break up for the Australian and New Zealand building materials provider and property group, arguing the current conglomerate structure is ineffective.

Jarden’s slim down scenario sees Fletcher Building down to four divisions in New Zealand, including Concrete, Distribution and Building products, including steel.

The rest of the business would be sold, netting $NZ3.1bn in proceeds.

The analysts believe that with the company currently trading on seven times its earnings before interest, tax, depreciation and amortisation, a slimmed down scenario has exited businesses bringing in $NZ3.1bn at an average price of 9.2 times EBITDA, leaving four remaining core businesses on 10 times estimated for the 2024 financial year.

Assuming a pre-tax provision for Iplex of about $NZ775m, the analysts say its slimmed down strategy results in a midpoint valuation of $NZ5.87 per share, a 42 per cent premium to the share price.

The analysts say that with Fletcher Building’s balance sheet not in distress, pursuing such a strategy needn’t be rushed.

Analysts have started poring over the results of Fletcher Building as calls come from some investors for a company break-up, either now or in the future when the market improves.

A disappointing half year earnings result saw the announcement of departures by its chairman Bruce Hassall and chief executive Ross Taylor.

The share price hit a three-year low on February 15 at $3.35, taking its market value to $2.6bn, but it has since recovered over 15 per cent to current levels to about $3.84 or $3bn market value amid a period when global groups are buying Australian building materials assets (CRH buying Adbri and Saint Gobain buying CSR).

Jarden said with exposure to multiple channels in the building and housing market, it should be in a position to outperform most single-sector competitors in understanding the building economy.

With 25 businesses, Jarden said one potential strategy to address this may include slimming down the company, enabling a reduction in complexity and increase in focus that helps Fletcher Building better navigate a cyclical industry.

They believe that the Australian business, excluding distribution, sells at 8.5 times EBITDA, below the bottom end of its peer set.

“We are of the view that value can be unlocked by selling the Housing division land bank and unlocking the working capital,” it said of the unit across the Tasman.

“In our mid outcome expectation, we assume that this sells for a 10 per cent discount – to allow some sale buffer - to current market value - about NZ$1.157bn.

Fletcher Building has a land bank valued at $NZ985m, including $NZ750m of housing land, $NZ76m of industrial development land, $NZ302m work in progress less $NZ141m of other items with the current value $NZ300m above book value.

“Fletcher Building has $NZ1.29bn of funds that could be unlocked upon sale of this division, while only losing out on about $NZ80m to $NZ100m of earnings before interest and tax per annum.”

The analysts assume very little for construction, with unknown trailing commitments to projects if they were sold.

They said this financial year, Fletcher Building was near the bottom of the cycle.

“If Fletcher Building were streamlined down to just these four businesses, then Fletcher Building’s estimated EBITDA for the 2024 financial year in the low case would fall to about $NZ448m.”

“We assume that if the company is slimmed down, we estimate that the central head office costs would be reduced from $NZ72m to $NZ50m, leaving group EBITDA at $NZ398m.”

BRIDGET CARTER

DATAROOM EDITOR

Bridget Carter has worked as a writer and editor for The Australian’s DataRoom column since it was launched in 2013, focusing on capital markets, mergers and acquisitions, private equity and investment banking.