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The Fletcher Building Limited (ASX:FBU) share price surges on turnaround plans

Shares in Fletcher Building Limited (ASX: FBU) climbed 3% higher to $ 6.40 on Thursday, after CEO Ross Taylor outlined the new corporate strategy at the company’s investor day in Sydney.

The New-Zealand based construction giant went through a critical phase recently. In February, Fletcher announced losses of over $600 million on its Building + Interiors business – now closed – that required a renegotiation of the company’s financial covenants and will almost entirely offset gains from other segments over FY18.

The stock plunged to a multi-year low of $5.18 early in April, but has since gained 24%. The rebound started with rumours that Fletcher was a takeover target for Wesfarmers Ltd (ASX: WES), but continued after the speculation was denied, as Fletcher made a $700 million capital raising and prepared a restructure of the business.

The first step will be the divestment of overseas arms Formica and Roof Tile Group, to shift the focus on local markets. Mr Taylor commented: “While we don’t expect these markets to experience the same levels of growth they have seen in recent times, we do expect them to remain stable, and with only 15% share of the New Zealand market and 1% in Australia, there is plenty of opportunity to deliver more from our existing operations.”

In New Zealand, the company will grow its core building products and distribution business, and ramp up infrastructure and roading. In Australia, after improving the operating and financial performance of existing businesses, Fletcher will move on to expanding through acquisition. The turnaround should produce strong earnings growth from FY21.

A simplified operating model for the highly diversified group will be rolled out in July, with one-off costs of $80 million in FY18 to be compensated by a $28 million reduction of annual overheads. The restructure also required a number of new appointments.

Dean Fradgley, currently Chief Executive Distribution, will lead a new division comprising all Australian operations, including plumbing and bathroom retailer Tradelink and decorative surfaces supplier Laminex.

Foolish takeaway

I think this was a convincing turnaround plan from Fletcher, and the current stock price could provide a buying opportunity if you are willing to wait for the company to reap the benefits of its restructure.

For a materials stock with more immediate growth prospects, I would consider Reece Ltd (ASX: REH), which recently announced a $2 billion acquisition intended to ride the next construction boom in the USA.

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Motley Fool contributor Tommaso Autorino has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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