Fears Fletcher may sink further into red

Analysts weigh up state of play as building giant’s shares slide

Finance experts fear more red ink from Fletcher Building — on top of the $952m of expected losses from a troubled business unit over the past two years.

Matthew Goodson, managing director of Salt Funds Management, questioned yesterday whether the full extent of losses on Auckland’s NZ International Convention Centre (NZICC) and Commercial Bay had been accounted for, saying these jobs were only partially built. Further losses might be on the cards, he said.

That followed revelations that Fletcher’s Building + Interiors division will lose almost $1 billion in a two-year period.

Difficult construction contracts caused losses at B+I of $292m in the year to June 30, 2017, but a further $660m of losses were projected in the current financial year, chief financial officer Bevan McKenzie told a press conference yesterday.

Fletcher chairman Sir Ralph Norris, who had already announced his resignation over the fiasco, cited quantity surveyor estimates as one factor behind the losses and said that these were as much as 100 per cent wrong.

Rising building costs and the flow of communication from management to the board were other reasons for losses — which McKenzie said amounted to $952m during the two years.

The announcement of the losses ended a week-long trading halt for the company, which saw its share price plunge 13.3 per cent when the stock exchange opened yesterday morning. It pared back some of that drop throughout the day, closing down 9.27 per cent at $7.05.

That means the day’s trading wiped more than $500m off the company’s market capitalisation.

“There’s uncertainty,” Goodson said yesterday. “The NZICC is a very sizeable contract in the $400 million to $500 million range so to lose $410 million is a very significant provision.

“The point about it is the uncertainty given you are only 22 per cent through,” he said citing Fletcher’s update of progress on the site.

“With Commercial Bay, it’s just a timing thing. When you are only part way through the project, there’s a greater risk,” he said, citing the potential for more red ink to flow.

Fletcher said that the mixed retail and commercial waterfront project was now only 39 per cent complete.

“We’ll only know once those projects are completed,” Goodson said of more potential losses from the two contracts. He also pointed to no capital-raising announcement as yet, but a half-year dividend cut.

However, Goodson expressed confidence in new chief executive Ross Taylor, saying he was highly regarded, had a strong reputation “and is a fresh pair of eyes”.

Another finance expert indicated surprise at a lack of capital raising to shore up the balance sheet, leveraged to the tune of $2.1b.

Stephen Bennie of Castle Point said: “The balance sheet is now quite stretched and in my view, a rights issue at this point would have been the sensible option.” The board might be planning asset sales, he said.

“The problem with that approach is that they are forced sellers and any potential buyers will be well aware of that, and frankly you seldom realise a great price in that situation,” Bennie said.

“Stopping the dividend will have been done very reluctantly. A large chunk of Fletcher Building’s shares are owned by dividend yield investors. They effectively become forced sellers, which will weigh heavily on the share price for some time.

“Looking back, it was a dreadful decision by the board to ignore its internal guidelines, regarding pay out ratios and debt levels, so that they could maintain previous dividend levels, at its last result. That decision, probably made to avoid dividend yield investors selling, has only compounded the issues they currently face,” Bennie said.

Shane Solly of Harbour Asset Management was less concerned although appeared startled by the losses: “The write-off was larger than many had expected.”

But Fletcher had improved levels of disclosure in its process, Solly said.

“Cutting of dividend for first half is a tough decision but makes sense while the company goes through transition,” Solly said.

Mark Lister, head of private wealth research at Craigs Investment Partners, said yesterday’s share price could have been much lower if the company had planned a big capital raising to rectify its debt problems, as some in the market had suggested.

“It was a good result considering it could have been much worse than that if they had had to do a dirty great big capital raising,” he said.

Lister said weakness in Fletcher Building was the main reason behind the index’s near 1 per cent fall in the opening minutes of trade.