The big news today is that the Fletcher Building Ltd [ASX:FBU] share price is down 3.79%, at time of writing.
It released details of its organisational reset, which includes a cut of 10% of staff — 500 in Australia and 1,000 New Zealand.
Among the most interesting is Fletcher’s base case scenario, or outlook for the housing market.
Here it is:
‘In Australia, residential approvals prior to COVID-19 had been showing signs of renewed growth from a base of around 150,000. Our base case is that we now expect approvals to fall by a further c15% to c129,000 in FY21. In commercial and infrastructure, we expect a similar dynamic to that of New Zealand with the value of work done declining by similar percentages in both sectors.’
Bringing up the FBU share price chart, it is an interesting one:
You can see a slump followed by a brief spurt of optimism, and the FBU share price is now trading near the March market low.
Unlike many larger companies with similar charts, it has yet to follow the market higher in any sustained way.
Is Fletcher’s pessimism justified?
The company stresses that it is ready to adjust to increased demand should it arise.
The pessimism is still strong though.
Fletcher’s CEO was quoted in the AFR as saying the following:
‘I actually think it’s inevitable that once unemployment goes up, once immigration has the brakes on it … that reality is really going to impact consumer spending and therefore the residential softness and downturn is real.’
The key to remember here though is that a tightening of supply could provide support to prices down the track.
In other words, it’s not all bad news.
Outlook for the FBU share price…
For clues, it may be worth considering a company that is in the building supply business.
The flow on effects of fewer approvals would see weakening demand for the raw materials that go into property construction.
Take for instance the Boral Ltd [ASX:BLD] chart:
Very similar, but if you look closely you can see it is holding a level better than the FBU share price.
As such, it’s a bit of a conflicting signal.
A downturn in the coming months for the BLD share price may signal a sharper mid-cycle slow down for the Aussie real estate market.
But should Boral pick up further, then perhaps Fletcher’s fears may prove to be overstated.
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