Building materials and construction giant Fletcher Building has signalled tougher times ahead, downgrading its full-year guidance by as much as $55 million amid softening residential markets and poor weather conditions.

The company was due to report its interim result on Wednesday but came out two days early with a market update and numbers for the first half showing net profit down 46 per cent to $92m, although operating profit was up 8 per cent.

But it was the fresh full-year guidance that spooked the market, sending the shares down more than 6 per cent.

Fletcher said its Earnings before interest and tax (ebit) for the June year are now expected to come in between $800 million and $855m, down from $855m-plus announced at its October annual shareholders meeting.

Chief executive Ross Taylor flagged a less rosy year ahead, saying the company expected a “softening” of residential markets to continue in 2024 here and in Australia.

“This lower activity is likely to reduce volumes in our materials and distribution businesses by circa 10 per cent to 15 per cent compared to what we have seen in the first half of the current year.

“And it is likely to mean that house sales in our New Zealand residential development business are at similar levels in FY24 to what we expect to deliver this year,” Taylor said.

Fletcher revealed net profit for the six months ended December was $92 million, which included a previously announced $150m provision for the NZ International Convention Centre, costing that amount more to fix than expected since the 2019 fire damage.

Total revenue for the half year rose 5 per cent from $4.06 billion to $4.28b and ebit, the company’s preferred financial metric, was up 8 per cent at $360m.

Fletcher’s housing division made ebit of $49m in the first half, less than half the $112m previously.

On reporting the result two days early, a spokesman said that was “good governance and in the interests of keeping the market informed in a timely way”.

Taylor said: “Our half-year performance reflects the momentum we have achieved from executing our strategy, focusing on our customers and delivering sustainable growth, all against the backdrop of a dynamic operating climate.”

He said the materials and distribution divisions led the group’s revenue, EBIT and margin improvements lately.

The slower growth in housing could be offset by other factors. Taylor said commercial and infrastructure markets were expected to be more robust.

Fletcher Building CEO Ross Taylor. Photo / Michael Craig

The construction division returned to first-half ebit profitability, albeit was impacted by an additional provision on the NZICC, announced in December,” Taylor said.

However, bad weather at the start of this year was taking a toll on the second-half result.

“While the underlying performance of the business is strong, trading in New Zealand in January-February has been heavily impacted by the adverse weather events. As such, we are now forecasting FY23 ebit before significant items in the range of $800m to $855m, with market activity and house sales in the remainder of the year expected to be the key driver of our result,” Taylor said.

At the end of last month, analysts Rohan Koreman-Smit and Paul Koraua of Forsyth Barr ranked the company favourably, saying construction cost overruns were behind the business which was lowly geared.

But they also flagged the extra $150m that the NZICC needs to be finished on that major repair.

“While we expect near-term construction activity to decline, we are well placed this cycle. Legacy issues are largely behind it, margin targets are being met, capital allocation is focused on organic growth and Fletcher has low debt level,” the analysts said in their January 30 report headlined “going cycling”.

On January 30 - before the profit downgrade - they had a 12-month target price of $6.10 on the shares, trading at the end of January at $5.40, giving a market capitalisation of $4.2 billion.

“We acknowledge that the near-term outlook for residential construction activity is negative and Fletcher’s track record does not endear it to investors. Operationally, Fletcher is in the best shape it has been for a while,” the analysts said last month.

Grant Swanepoel of Jarden had also raised his forecast earnings, citing strong momentum and some evidence the company had been able to increase prices.

Fletcher shares recently traded at $5.06, down 6.64 per cent on Friday’s close.

The market will now await more details when Fletcher releases its full financial results for the first half.