Fletcher blow-out $231m: Analysts
Construction division could face further losses
Costs on two big Fletcher Building projects have blown-out by an estimated $231 million and the company’s construction division faces further potential losses, analysts say.
New Zealand’s biggest construction company has also seen $1.7 billion wiped off its sharemarket value since February.
As well as announcing the immediate departure of chief executive Mark Adamson, Fletcher on Thursday downgraded its earnings guidance for the year to June from $610m-$650m to $525m, citing work on two major projects where there had been a need for more project resourcing and issues with timelines and completion. The company did not name the projects.
Emily Smith, Leanne Truong and Lee Power, research analysts at Deutsche Bank, issued a report after the downgrade estimating Fletcher’s cost over-runs.
The trio named the nearly finished Justice and Emergency Precinct in Christchurch and the NZ International Convention Centre for SkyCity Entertainment Group, now due for completion in mid-2019.
“On our numbers, the total cost over-runs for the Justice Precinct amount to $146m (project value $300m) and for SkyCity are approximately $85m (project value $700m),” Smith, Truong and Power wrote in a report after Fletcher’s surprise announcement.
The analysts also raised the prospect of Fletcher selling pipes business Iplex and plumbing business Tradelink, written down by $220m on Thursday. These two businesses are “non-core and would be divested at book value if possible,” the analysts said.
Fletcher shares closed on Friday at $7.48, down from a high last September of $11.10. UBS analysts Angus Simpson and Marcus Curley commented on Fletcher’s rapid fall in market capitalisation.
“FBU’s market cap has dropped $1700m since the first half-year result [in February],” Simpson and Curley said.
But the market was pricing in a significantly worse outcome than what had already been announced, they said.
UBS forecast 2017 revenue of $9.4b, $9.7b in 2018, dropping to $9.6b by 2019 and $9.5b by 2020.
Kar Yue Yeo and Andrew Peros, analysts at Credit Suisse, also raised concerns.
“Unsurprisingly, the company is unable to offer certainty on the risks of further contract losses on the two major contracts and other minor contracts,” they wrote.
“The company attempted to allay concerns about the extent of future risks on existing contracts and bids for new contracts in terms of ‘belt and braces’ measures introduced by the new management team within the construction division.
“However it is the nature of construction when until a project is completed and becomes unconditional, the final financial outcome will not be known.”
The Credit Suisse analysts believed it was unusual for Fletcher’s construction division to record any losses.
“The contracting industry is inherently a volatile business, which requires a high degree of rigour in pricing risks. Except for this period over the last twelve months, Fletcher has in the last 15 years had a relatively strong and profitable track record in construction operations,” they wrote.
Those analysts could not recall a phase where the company had incurred or provided for a total of $245m in construction contract losses, as it had done in the past four months on three separate occasions.
A Fletcher spokeswoman yesterday said the company couldn’t provide comment on specific projects nor on its expected results.
She said the firm had not made any comments suggesting divestments.