Construction drags Fletcher result

Analyst estimates one-off loss on large building project cost company $30m

Fletcher Building’s share price slid 5.2 per cent wiping $367.8 million off the company’s market value after the construction giant posted its half-year result.

The company’s shares closed down 53c yesterday at $9.68.

At a media briefing after the interim result was released yesterday, chief executive Mark Adamson referred to “losses on one large construction project” saying large projects were those worth $150 million or more.

Adamson would not expand on a one-off construction job loss, estimated by one analyst to be $30 million.

“We won’t, we can’t, we never will,” he said of the refusal to name the project which cost the giant listed entity such a large sum that it hit the construction unit’s performance. However, no more money would be written off on the mystery build, he said.

“If on day one, you think you are going to lose money, you have to book it straight away,” he said. Asked if it was $30 million, he replied: “It’s commercially confidential. It’s a detailed programme management issue.”

Kar Yue Yeo of First NZ Capital said the result was below expectation due to the construction unit.

“Overall group ebit (earnings before interest and tax) margin: 6.7 per cent compared with our 7.1 per cent estimate in the first half, driven substantially by weaker performance in the construction division,” Yeo said, estimating losses of about $30 million on that one project alone.

Matthew Henry of Forsyth Barr described the result as “below our expectation”, principally due to a lower performance from the construction business.

Excluding the newly-acquired Higgins contracting business, construction earned ebit was $5m compared to $36m in the previous corresponding period, Henry said.

“Construction is inherently opaque and can be impacted by project timing, but we suspect losses incurred on a major construction project have had a material impact on earnings,” he said.

“Besides construction, the result is generally solid with NZ ebit up 20 per cent (excluding construction and divestment of Pacific Steel) broadly in line with our expectation.”

Fletcher, with a $2.7b order book, pushed up revenue 4 per cent, from $4.4b to $4.6b, to make $176m net earnings after tax, up from $172m in its latest half-year.

The result for the six months ended December 31 included a net loss from significant items of $11m due to costs associated with site closures in Rocla Products and Fletcher Insulation.

Mark Lister of Craigs Investment Partners said: “At first glance, it looks a little softer than we would’ve liked.

“Overall, not hugely out of line with expectations.”

Fletcher’s share price had been up about 55 per cent in the last 12 months, compared to the S&P/NZX 50’s rise of 16 per cent, “which means there is much less room for disappointment”.

Net earnings excluding significant items were 18 per cent higher at $187m. Operating earnings (earnings before interest and tax and significant items) were $310m, up 12 per cent on the $278m reported in the prior corresponding period.

This reflected a sustained improvement across almost all parts of the portfolio, signalling the benefit that businesses are getting from a strong New Zealand economy, improved customer propositions, operational efficiencies, cost reductions, and in some cases organisational restructuring, the business said.

An interim dividend of 20c per share will be paid on April 12, with full New Zealand tax credits attached.

Adamson said the result was driven by an excellent performance by the distribution and international businesses which both reported increases in operating earnings in excess of 30 per cent versus the previous comparable period.

Fletcher won contracts to build the two largest New Zealand construction projects: Precinct Property’s $850m 39-level Commercial Bay waterfront office/shopping tower and SkyCity Entertainment Group’s $700m NZ International Convention Centre in the heart of Auckland.

Analysts tipped Fletcher to have a strong 12 months in its financial year to June 30, 2017.