Profit warning: Fletcher dives
Investors punish construction giant after AGM news
Fletcher Building's turnaround strategy is under further question after the construction firm shocked the market with a profit warning for the first half.
Investors punished the stock as Fletcher's board addressed the annual shareholders meeting in Auckland. By the end of the day's trading the share price had fallen more than 10 per cent, wiping about $500 million from its market capitalisation.
Fletcher shares closed at $4.93, down 62c, after the company said its earnings before interest and tax for the year to June 2019 are expected to be $630-690m before any significant items, compared with the $710m in the year just ended.
The company, still reeling from near billion dollar losses from its high rise Building + Interiors business, put the latest earnings guidance down to challenging Australian trading conditions, the timing of house sales in its residential division and an outage at its Golden Bay cement plant.
Grant Swanepoel, an analyst at Craigs Investment Partners, said the market reaction reflected surprise at the earnings guidance downgrade, amid concern about Fletcher management's ability to execute a turnaround strategy after last year's $190m loss.
“This company had clearly guided to a turnaround programme in Australia that is supposed to double earnings before interest and tax by 2023 from the 2018 full year numbers.
“And we all were aware then that the Aussie market was toppish, if not on its way down already, and therefore you had to really believe in management to buy a strong turnaround programme into a headwind like that.
“All this is saying is that they have little ability to create proper change when you have headwinds in the Aussie housing markets now. They were supposed to show some sort of underlying turnaround and momentum which is just not there. So I think the market is just extrapolating that forward and discounting management's capabilities even more than what they were beforehand.”
Swanepoel also questioned the company's statements on reinstalling dividend payments, which Fletcher said were still subject to “satisfactory trading conditions and group cashflows”.
The company cancelled its dividend payout in August when it posted a full-year loss of $190m compared to a $94m profit the previous year. An announcement on the dividend is expected at the interim result in February.
Swanepoel questioned why Fletcher stressed the need to clarify its cashflow position to confirm a dividend when it was apparently willing to spend up to $300m on buying Steel & Tube. The company's board last month withdrew a proposal to acquire Steel & Tube.
“That's another big fail,” Swanepoel said.
The expected poor first-half and annual outcome marks a difficult year for chief executive
Ross Taylor who took over from Mark Adamson who was forced out a year ago. Former chairman Sir Ralph Norris also departed, taking blame for the company’s disastrous B+I losses.
Speaking to Businessdesk after the annual meeting, Taylor attempted to brush away the poor on-going earnings as being due to factors outside his control: a breakdown at the Golden Bay Cement plant and the resulting four-week outage, which will shave $8-11 million off first-half earnings, and “the Australian residential market is softening faster than anybody thought”.
That should have come as no surprise because a number of Fletcher’s competitors have already made similar comments, Taylor said.
At the annual meeting five new directors brought on board since the B+I debacle began to unfold sought to answer criticisms levelled at the company by the New Zealand Shareholders’ Association for not choosing more people with relevant industry experience.
Martin Brydon, managing director of Australian-listed Adelaide Brighton, talked about his 40 years in the building products industry.
Rob McDonald, former chief financial officer at Air NZ and now chair of Contact Energy, told shareholders he began his career in the 1980s with “a leading Australasian building company”. Former ASB chief executive Barbara Chapman and now Genesis Energy chair and a director of New Zealand Media and Entertainment extolled her “extensive commercial experience”.
Cathy Quinn, a commercial lawyer who used to chair MinterEllisonRuddWatts, said much of her 33-year career had included working on mergers and acquisitions, experience she will be able to bring to bear on Fletcher’s future acquisitions.
Doug McKay, the one director that the association voted against because he appears to be over-committed, said he had stepped down from Ryman’s board and so had sufficient time to devote to Fletcher Building.