Opinion split on Fletcher plight
Should the builder have raised funds instead of suspending its dividend?
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.