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The purpose of this business report is to provide an insight on Fletcher Building Limited (FBL) to give
advice on whether it is worth to invest in. Conclusion is made base on the analyses of key findings from
financial and non-financial information. The Internet is the main source of information for this report.
Fletcher Building Limited (FBL) is a New Zealand based company which undertakes construction projects
and manufactures and distributes building materials.
Fletcher Building has started as a construction company almost 100 years ago before becoming one of
four divisions of the Fletcher Challenge Limited group. Fletcher Building separated from that group in
March 2001, and since that time we have become a profit table and highly respected public company.
The company has continued to grow, and over the last few years has purchased Laminex Group, Formica
Corporation, the Tasman Building Products companies and the Amatek group of companies. It will be a
participant in the proposed New Zealand Emissions Trading Scheme, with responsibility for the following
emissions (UDANGA, Business Day, 2011):
Industrial process emissions from the production of clinker at Golden Bay Cement’s Portland
(Whangarei) plant.
Non-CO2 combustion emissions from the use of waste wood as a supplementary fuel by Golden Bay
Cement.
Industrial process emissions from the production of steel at Pacific Steel’s Otahuhu (Auckland) plant.
Industrial process emissions from the production of glass-fibre insulation at Tasman Insulation’s plants
at Penrose (Auckland) and Christchurch.
Non-CO2 combustion emissions from the use of waste wood as a fuel at The Laminex Group’s particle-
board plant at Taupo.
1.2.1 Qualitative factors considered in evaluating the company’s future financial performance
Qualitative factors that should be considered in evaluating the company’s future financial performance
may include: (1) effect on employee morale, schedules and other internal elements; (2) relationships
with and commitments to suppliers; (3) effect on present and future customers; and (4) long-term
future effect on profitability. In some decision-making situations, qualitative aspects are more important
than immediate financial benefit from a decision.
In early September 2010, in Canterbury area was happened of 7.1 earthquake, it caused almost 4 billion
NZ dollors loss. Within the quake zone many houses need to be soldered, renovation or reconstruction.
This could be a good opportunity to any construction organisation. In New Zealand, Auckland-based
Fletcher has been awarded a contract to repair 50,000 homes damaged in the September 4 Christchurch
quake, work it estimated to be worth $1.2 billion. One of the arguments made for Fletcher to win the
Christchurch contract was its experience in rebuilding after natural disasters through the Pacific. "It was
Fletcher's expertise at responding to natural disasters in the Pacific Islands which was one of the points
put forward in our proposal," said Mr. Hudson (FLETCHER BUILDING LIMITED, 2011)
Strengths
Fletcher has offered up to A$740 ($983) million in cash and shares to fully own Crane Group
It delivered a total aggregate return of 435 per cent since its listing in 2001Fletcher Building released its
unaudited results today, showing a 7.8 per cent rise in earnings growth. Shareholders will receive an
interim dividend of 16 cents per share. Net earnings after tax rose to $166 million, compared to the
$154m it recorded for the same period in 2009. Operating earnings (EBIT) were $285m, up 5 per cent
period-on-period from $271m, resulting in 7 per cent higher earnings per share of 27.3 cents from 25.5
cents. Ling said the results are "strong" given the mixed market conditions.
Anecdotal accounts of Kiwis going across the Tasman to Australia to find better paying jobs in the
rebuilding activity following the Victorian and Queensland floods will not impact the delivery of
rebuilding outcomes in the Christchurch area. They have a preference for repair work labour coming
from the South Island and at this stage that looks very manageable.
The business drivers are external or internal influences that significantly impact and/or set direction for
programs. From several reasons to identified why we take them as drivers.
1.3.1 Strategy
The company must implement the strategy through plans and budgets that guide the activities of
individual business units. However, without the proper tools, strategy implementations can be very
challenging.
1.3.2 Technology
A technology platform that facilitates the rapid creation of planning, analysis and monitoring
capabilities, which provide critical insights in the form of forward-looking and historical indicators
1.3.3 Costs
Inside Fletcher Building Group, is a powerful force-a force that can cut costs, win customers and find
innovative new business opportunities all over the world.
Effective performance management helps ensure that employees at all levels are focused on objectives
that align with overall business goals. People are the key to a successful deployment; however, success
depends on more than having the right people. So effective performance management can implement
performance of business(What's important to us, 2011).
Reasons for considering them as drivers
Strategy helps Fletcher Building Ltd define where they are going and allows them to identify clear and
concise business objectives. As a leader in the over populated world of business your strategic planning
will help to become more proactive in dealing with economic and challenging times, help clarify how
company stands out from the rest and allows making responsible decisions. If Fletcher Building Ltd costs
are too high, then Fletcher Building Limited won't make a profit. If companies don’t make a profit, then
business will eventually have to shut down your business. A budget is important so that company don't
spend more money than you earn.
The basic resource in any company is people. The most successful companies will be those that manage
human capital in the most effective and efficient manner. Flectcher Building Ltd is beginning to
understand that to stay on top in the global economy, they need to place more and more emphasis on
developing and retaining their people. The human capital have the same or better skills and abilities, it
will lead the company to implement change. Good driver will increase organizational motivation(Why
strategy, 2010).
Model building
Compared these two years financial statement, Fletcher Building got 79 millions for unusual item, hence
EBIT is 370 million before tax in 2011, is lower than 414 million. However new taxations policy, in 2011,
which is much lesser than 2010 at 53 million.
2.1.1 Comment on the results of ratio analysis, horizontal and vertical analysis
Horizontal Analysis for financial performance looks at changes across the financial statements in dollar
and percent! This is important because it will show how a company actually is doing compared to what it
looks like it is doing.
Back to salesin 2011 is $7,416 and 2010 is $ 6,799. So 9% increased in sales. Sales/Revenues look good
so the company looks financially okay so far.
Let's look at what it cost the company to sell. 8% increased in the costs and this increased is more than
the sales/revenue increased for the 2011 comparison. This means that it costs more to sell the product
than we actually made worse. The Gross Margin is not as good as we need it coming to a $192million
increased and a 12% increase.
2.1.2 Cost of equity and cost of debt, beta, required return and WACC
From those worksheet, we can find 2011, Fletcher Building are borrowing more than 2010, because cost
of debt is 5753 million, increased 1955 million from 2010.That means Fletcher Building Group will take
higher risk than before. However, more debt also means share price will higher than priors, it’s good for
a company to collect funds.
2.1.3 Creating a Sales-driven financial statement model and prepare pro forma income statements and
balance sheets for the next five years.
From the sales-driven financial statement model, over that period, price growths rate is only 1%, that
couldn’t make any sense. And the sales growths is 9% in 2011, thus may relate to recession in the
economy and there has an earthquake in New Zealand, all of this can cut Fletcher Building Group sales.
Under pro forma balance sheets for the next five years, there is significant increasing in total asset .And
owner’s equity is slightly gained between those periods. On the other words, more equity means higher
debt from creditors. Thus higher EBIT in pro forma income statement.
As The Data Shows the number of Fletcher Building Ltd’s Employees has been growth each year. More
employees mean company need pay more salary; the company cost will spend more. If company takes
no notice of control number of employees and didn’t control cost. High salary paid will reduced the
profit for company. As times passed the high pay and larger number employees can bankrupt a
company. It is very dangerous for Fletcher Building Ltd.
Working capital increased by $148 million due to increases in inventory and debtors, and a reduction in
creditors. Capital expenditure for the period, excluding the acquisition of Crane, was $307 million, up
from $191 million in the prior year. Of this total, $200 million was for staying business capital projects,
$51 million was for new growth initiatives, and $56 million was for the acquisition of new businesses.
Signify cant
Investments during the period included the acquisition of Australian Construction Products, and the
expansion of the Laminex high pressure laminate plant in Queensland.
2.3 Sensitivity analysis for the four most important system variables
Sensitivity analysis is a system to analyze a change in the coming years for the Fletcher Building Ltd, in
any of the budget process there will always be uncertain variables. We passed four important system
changes to determine the company's direction and plans. For example, in the next few years, the
company of the Fletcher building of the growth rate of sales rising more than expected will be spent;
price changes will be in constant adjustment. Through this system we have a clearer understanding of
sales, cost and price changes for the future development will have an impact. If these variables are
deviated from the expected assumption, Sensitivity analysis of this system can give us with some advice
to enable us to set a good program before changes This system not only with the reliability of our
predictions, but also through the data change analysis to enhance a company's future development
(UDANGA, 2011).
In Scenario analysis, it can use three different analyses of the results of Fletcher Building's future
development, such as pessimistic, most-likely and optimistic. Fletcher Building in the forecast, these
three programs will be year1 sales, sales growth, Unit price and initial cash outflow of data to change
the PV of cash inflow and project NPV. In the process of forecasting, scenario analysis not only gives us
optimistic scenario, but also the pessimistic scenario will show out.
In this case, I suggest that investors can invest 200 million of the half million in the FBU, 100million in
TEL and the rest was in the bank can charge interest. In the long-term investment perspective by FBU is
good choice ( Calculate Financial Performance Using Horizontal Analysis, 2011)
Investment decision
Investments are valued at historical cost. Impairments in the value of investments are written off to
earnings as they arise. And to see the 2011 Dividends payment summary at table, as shareholder can get
more dividend, from this point, its worth to invest from Fletcher Building Group.
Recommendation
When taking into consideration the findings of this report I recommend not investing the funds in
Fletcher Building Limited. My reasons for this recommendation being:
As an industry Fletcher Building Limited as with other contraction companies is extremely susceptible to
external factors. This can be seen with the impact of economic downwards. (Why strategy, 2010). It is
for this reason that I find Fletcher Building Limited to be a high risk investment and would advise against
it.
Although in all areas signs of improvement have been apparent there is no guarantee with the global
situation, as delicate as it is, that these improvements will continue to increase or even be sustained. At
present I would not recommend investing in Fletcher Building Limited. The position of the business and
the direction it will take in the future is an ambiguity.