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Why the Fletcher Building share price could tumble lower today

The Fletcher Building Limited (ASX: FBU) share price will be on watch this morning after the building products company provided an update on the sale of its Formica business and its full year guidance.

At the time of writing its New Zealand-listed shares have dropped 4.5% lower.

What was announced?

According to the release, the company has now completed the sale of the Formica Group to Broadview Holding for US$840 million, less certain deductions and a working capital adjustment.

Based on a preliminary estimation of the working capital adjustment, and the average exchange rate applicable to the proceeds, management expects the net sale proceeds to be approximately NZ$1,185 million.

Fletcher Building’s CEO, Ross Taylor, explained the rationale for the sale.

He said: “The divestment of Formica completes one of the key aspects of the five-year strategy we announced in June 2018 to exit non-core International businesses. Our strategy is to refocus Fletcher Building’s capital and capability behind our New Zealand and Australian businesses, with building products and distribution at our core.”

Fletcher Building intends to provide further comment on the use of the Formica sales proceeds at its Investor Day on June 26.

Guidance update.

Due to the timing of the sale and a softer performance by Formica Europe and North America, management has revised its full year earnings guidance.

Fletcher Building had previously provided FY 2019 EBIT before significant items guidance of NZ$650 million to NZ$700 million. The International Division was expected to contribute NZ$110 million of this.

However, the impact of excluding Formica’s June earnings and the aforementioned softer than expected performance, means the International Division is now expected to contribute EBIT of approximately NZ$80 million.

In light of this, management has downgraded its FY 2019 EBIT before significant items guidance to be in the range of NZ$620 million to NZ$650 million.

This appears to have spooked the market and put its shares under pressure across the Tasman sea this morning.

Elsewhere in the sector, the Boral Limited (ASX: BLD) share price has been tipped to climb higher by analysts at Deutsche Bank. It has a buy rating and $6.70 price target on the company’s shares.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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