Opin­ion split on Fletcher plight

Should the builder have raised funds in­stead of sus­pend­ing its div­i­dend?

The New Zealand Herald - - STOCK TAKES - Jamie Gray jamie.gray@nzher­ald.co.nz

Fletcher Build­ing’s share price took a hit when it came off a trad­ing halt this week, but it could have been worse if it had gone to the mar­ket for funds.

The com­pany, a key con­stituent of the NZX-50, an­nounced fur­ther pro­vi­sions for ex­pected losses in its build­ings and in­te­ri­ors busi­ness, lead­ing to a pro­jected EBIT loss for the divi­sion of $660 mil­lion, and that it would not be pay­ing a half-year div­i­dend.

As the dust starts to set­tle from the de­ba­cle, the ques­tion for the mar­ket is: should the com­pany have gone back to the mar­ket to raise funds in­stead of sus­pend­ing its div­i­dend?

Opin­ion is di­vided on that score. Cas­tle Point Funds part­ner Stephen Ben­nie thinks the com­pany should have re­cap­i­talised.

“The bal­ance sheet is now quite stretched and, in my view, a rights is­sue at this point would have been the sen­si­ble op­tion,” he said.

But JBWere NZ eq­uity man­ager Rickey Ward said rais­ing eq­uity was not im­me­di­ately nec­es­sary.

“De­spite these pro­vi­sions be­ing large and fully ac­counted for ‘in one hit’ from a cash flow man­age­ment per­spec­tive they oc­cur over a pe­riod of about three years.

“Fur­ther­more, rais­ing eq­uity tends to oc­cur when com­pa­nies are in stress or re­quire cap­i­tal for ex­pan­sion,” he said. “While there are many rea­sons be­hind why these projects have be­come prob­lem­atic, the breaches are not sol­vency-re­lated and there­fore not stress-re­lated,” he said.

“They are man­age­able, al­beit sus­cep­ti­ble to fur­ther un­knowns, mar­ket slow­down and ad­di­tional pro­vi­sions.”

Ward favoured a dis­counted div­i­dend rein­vest­ment plan, which would have given the com­pany a flex­i­ble method of ad­dress­ing fu­ture po­ten­tial cap­i­tal re­quire­ments in a con­trolled man­ner.

Fletcher Build­ing, in this week’s an­nounce­ment, in­di­cated that the un­der­ly­ing busi­ness was track­ing well.

“It is easy to let head­lines dom­i­nate what is re­ally oc­cur­ring for the ma­jor­ity of the busi­ness which, at face value, ap­pears sound,” Ward said. On the pos­si­ble as­set sales front, Fletcher Build­ing’s US unit, Formica, has been men­tioned as a pos­si­ble con­tender.

Af­ter the ini­tial shock over the size of the down­grade, Fletcher Build­ing shares closed yes­ter­day at $6.96, down from $7.77 be­fore last week’s sus­pen­sion, and up from its postan­nounce­ment low of $6.74. Fletcher Build­ings makes up 6.2 per cent of the NZX-50 in­dex.

IPO prospects

As far as ini­tial public of­fers go, last year was one to for­get.

This year does not look like be­ing much bet­ter — un­less of course Voda­fone NZ comes to the mar­ket.

How­ever, 2019 may well be the one to watch, ac­cord­ing to law firm Chap­man Tripp. One trend that we ex­pect will be in­flu­en­tial in com­ing years is a re­newed pipe­line of pri­vate eq­uity port­fo­lio com­pa­nies look­ing to ini­tial public of­fer.

Sev­eral New Zealand pri­vate eq­uity firms have raised new funds re­cently — in­clud­ing Di­rect Cap­i­tal V, Water­man Fund 3 and the Pen­car­row Bridge Fund — which have al­ready in­vested in a num­ber of com­pa­nies.

In ad­di­tion, pri­vate eq­uity funds con­tinue to hold in­vest­ments from past funds which they will look to exit over time, the firm said in a re­port.

Exit by IPO may be par­tic­u­larly at­trac­tive for pri­vate eq­uity port­fo­lio com­pa­nies that have a strong re­tail brand and cus­tomer pres­ence. Po­ten­tial con­tenders that have been pub­licly mooted in this cat­e­gory in­clude Part­ners Life and My Food Bag.

“We think that there are a num­ber of as­sets that are sit­ting in pri­vate eq­uity own­er­ship that may well be at the right stage of their life­cy­cle come 2019, and beyond, to come to the mar­ket,” Chap­man Tripp part­ner Rachel Dunne said.

QEX lists

QEX Lo­gis­tics, a cross-bor­der lo­gis­tics com­pany, de­buted on the NZX’s mar­ket for small and mid-sized busi­nesses — NXT — yes­ter­day. The com­pany aims to even­tu­ally list on the NZX and eyes ex­pan­sion in Aus­tralia.

Auck­land- based QEX, which fa­cil­i­tates the stor­age, sup­ply, pack­ag­ing, cus­toms clear­ance and de­liv­ery of New Zealand prod­ucts bought from stores, on­line and e-com­merce sites by in­di­vid­ual con­sumers from China, was founded in 2010 and now has rev­enues of more than $22m.

QEX’s cus­tomers in­clude SKY Dis­tri­bu­tion, the brand mar­ket­ing firm for Fon­terra’s An­mum in­fant for­mula, Munchkin for­mula maker, and Fon­terra’s An­chor brand.

The stock first traded at 45c and closed at 39.5 cents, a 58 per cent pre­mium, valu­ing the com­pany at $19.9m.

Pic­ture / Ted Baghurst

Ce­cilia Robin­son, founder of My Food Bag. An IPO may be par­tic­u­larly at­trac­tive for such a com­pany with a strong re­tail brand and cus­tomer pres­ence.

Source: Bloomberg / Her­ald graphic

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