Valuecruncher recently completed a valuation of Fletcher Building ($FBU.NZ). Since then the company has announced reduced earnings expectations for the 2009 financial year.

When Valuecruncher completed our valuation the $FBU.NZ was trading at NZ$6.20 - and we produced a valuation of NZ$7.24. Today $FBU.NZ closed at NZ$5.56.

With the additional guidance we decided to revisit our valuation.

We kept all our previous assumptions constant but revised our profitability assumptions. Reuters has $FBU.NZ’s EBITD margin at 13.0% last year and an average of 14.2% for the last five-years.

For our analysis we have lowered our 2009 EBITDA margin to 9.0% with 2010 at 11.0% and 2011 at 12.0%.

Revised Valuecruncher valuation model of FBU.NZ with interactive assumptions

This adjustment produces a valuation of NZ$5.98 - 7.6% above the current share price of NZ$5.56.

Our analysis incorporates the cash and debt the FBU.NZ balance sheet – Valuecruncher calculates a net debt number.

Play with our assumptions – what does your analysis say?

Disclosure: None

Fletcher Building (FBU.NZ) is New Zealand’s second largest company by market capitalisation. The company is a building materials manufacturer and distributor. FBU.NZ is trading at close to a 52-week low of NZ$6.20. Time to run some numbers.

Valuecruncher valuation model of FBU.NZ with interactive assumptions

Valuecruncher produces a valuation of NZ$7.24 for FBU.NZ. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 16.8% above the current share price of NZ$6.20.

Assumptions

• Revenue: Reuters aggregates nine analysts covering FBU.NZ and these analysts have mean estimates of 2009 revenues of NZ$7.1 billion. For our analysis we have used NZ$7.0 billion in 2009, NZ$7.25 billion in 2010 and NZ$7.5 billion in 2011.
• Profitability: We have used an EBITDA margin of 12% in 2009 and 2010 rising to 13% in 2011. Reuters has FBU.NZ‘s EBITD margin at 13.02% last year and 14.15% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of NZ$250.0 million flat moving forward.
• Discount Rate: 12.0%. The PwC New Zealand cost of capital report has FBU.NZ at a WACC of 13.4% with the wider NZ market at 9.5%. We feel that 13.4% is too high. We believe there is an argument for a discount rate anywhere in the 9-12% range for FBU.NZ.
• Terminal Growth Rate: 3.0%. The New Zealand economy has grown at an average rate of 2.6% over the last five-years. We see FBU.NZ growing broadly in-line with this moving forward.

Our analysis incorporates the cash and debt the FBU.NZ balance sheet – Valuecruncher calculates a net debt number.

Play with our assumptions – what does your analysis say?

Disclosure: None

Valuecruncher has placed a value of $12.84 per share of Fletcher Building stock. The current share price of $10.85 is below the mid-point estimate but well with the range of $7.43 to $18.65.

Key Assumptions 

Revenue Growth

The key assumption in this analysis is revenue growth of 15% for the 06/07 period and 10% growth for the 07/08 and 08/09 periods. Although revenue growth for the past three periods has been very high (ranging from 19.07% in the 05/06 period to 22.88% in the 03/04 period) this type of growth is not sustainable, and it is for this reason that we have steadily declined revenues growth towards the terminal growth rate of 3%.

EBIT Margins

EBIT margins have also been declining in the past two years (13.20% in 2005 and 12.23% in 2006). We have forecasted the EBIT margins for the next three years to be 11%, 10% and 9% of revenues.

Discount Rate (WACC)

The discount rate applied in the analysis is 10% (as in the September 2006 PwC Cost of Capital Report).

Terminal Growth

Terminal growth has been set at 3%

Flectcher Building Valuation