Fletcher troubles highlight sector strain
Are the construction giant’s problems its own or just part and parcel of a boom-bust industry? Catherine Harris reports.
The Justice Ministry’s new precinct in Christchurch will probably cost about $130 million to $140m more than expected to complete, JBWere analyst Ricky Ward estimates.
However, it will be Fletcher Building – rather than taxpayers – that picks up the bill.
Ward said the Justice and Emergency precinct was initially expected to cost about $270m.
The new estimates broadly tie in with comments made by Fletcher Building, which reduced its earnings forecast by $150m in March and then by about another $100m last week.
The company said about half of its latest profit warning could be attributed to a project – known to be the Justice precinct – that was due for completion later this year, about a quarter to the International Convention Centre being built by SkyCity in Auckland, with the remainder spread across other projects that were due for completion over the next nine months.
Fletcher Building’s troubles, which also appear to have cost chief executive Mark Adamson his job, are age-old problems that highlight the stress the industry is currently under, industry watchers suggest.
Deutsche Bank estimates the company has lost a total of $231m on the Justice precinct and convention centre projects combined – a little more than Ward’s estimate of $200m.
Fletcher would not comment, saying it would leave those calculations to others.
The company has indicated it may write $220m off the value of two Australian businesses when it reports its annual result next month.
In construction, budget overruns can stem from misquoting, shortages in labour or materials, design changes or taking on too much work.
While Fletcher did not go into the fine details, investor relations manager Philip King told analysts last week that the industry was under huge strain.
‘‘We must acknowledge the New Zealand industry is absolutely at capacity and you’re seeing that reflected in subcontractor rates and the availability of resources for jobs, etc,’’ King said.
‘‘I know we’re having our share of pain today but there’s no doubt the industry as a whole is really struggling with so much work on.
‘‘It’s an unprecedented level of activity, it’s ramped up very quickly and if you don’t manage it carefully, we can attest it hurts you certainly.’’
King hinted that subcontractors had been part of the problem. ‘‘I could quote several minor instances where if we’d applied liquidator damages to our subcontractors they would have failed,’’ he said.
‘‘They’re minor in a dollar sense but they can have an impact on jobs which is frustrating. We just have to work with them to get the job done.
‘‘I think we’re going to see more stress in the industry as this goes by with smaller subcontractors.’’
Shane Solly, an analyst at Harbour Asset Management, said the boom-bust nature of construction was ‘‘extremely challenging at the best of times’’.
‘‘Getting consistency is really important, because sustainable levels of workload allow people to invest for five, 10 years … That’s not something we’ve had historically in New Zealand.’’
There were always cost blowouts, site difficulties and obstacles, but there was ‘‘no doubt’’ Fletcher had other problems, and it was not clear whether people within the company had taken their eyes off the ball, or failed to be nimble enough, Solly said.
‘‘A lot of businesses in New Zealand are facing some quite rapid changes. Certainly things like bonding have changed the construction industry. The ability for subcontractors to, for example, pour a concrete floor for you – I have to put a bond up to cover any problems in the future.’’
Bonding was so expensive that ‘‘a lot of people have gone, we just can’t enter into these contracts … There’s a number of things that have gone on that have put some strains on the construction industry.’’
Whoever took over at Fletcher would need to address its direction, which had shifted from ‘‘building materials-focused’’ to bigger roles in construction, land development and housing.
The company itself has signalled it will put more emphasis on the flourishing infrastructure sector in future.
Meanwhile, questions remain about whether the board of Fletcher Building will remain unscathed by the company’s woes and who will replace Adamson.
The Shareholders Association has so far declined to say whether chairman Sir Ralph Norris is secure, but has said questions will be asked.
Mark Binns, a former Fletcher head of infrastructure who now heads up Meridian Energy, has been floated as a potential chief executive. Binns, who leaves Meridian at the end of the year, declined to comment.
Solly said Adamson had done a good job in many parts of the business, but his departure gave the company ‘‘a chance to really think about re-engineering itself’’.
Ward agreed that ‘‘on the numbers, Mark has delivered on most of the job’’, and that he had ‘‘made it very clear … that should he have another disappointment that he wouldn’t be here to deliver the next result’’.
Whoever took over from Adamson would have to understand the New Zealand market well, Solly said.
"Sustainable levels of workload allow people to invest for five, 10 years … That's not something we've had historically in New Zealand." Shane Solly, analyst