Building giant’s mea culpa leaves market shaken
Fletcher CEO gone and shares punished after budget blowouts on major projects, writes
ANALYSIS: Fletcher Building’s financial troubles have claimed their biggest scalp, that of chief executive Mark Adamson.
The country’s biggest construction company is entering a new chapter after announcing yesterday that it was the right time for another person to take the helm and that an internal acting chief executive would take over on Monday.
Adamson came to Fletcher five years ago, with a strong track record in Fletcher’s laminates subsidiary overseas.
The Scotsman brought with him some of his own team, and analysts say he appears to have done a largely effective, if painful, job of exiting low-performing businesses and pulling Fletcher’s many subsidiaries into a better working whole.
However, JBWere analyst Rickey Ward said Adamson was also a straight talker and that alienated some staff.
Problems compounded late last year when several longstanding senior staff left – in Adamson’s words, ‘‘heads rolled’’ – as it became clear its building and interiors division was suffering a huge budget blowout.
In February it was an unhappy Adamson who braced the market for a profit downgrade of up to $150 million, threequarters of it due to cost over-runs and delays on two major projects.
They are understood to be Auckland’s SkyCity convention centre and Christchurch’s Justice Precinct.
Now the company faces an operating profit of $525m for the year to June 30 – $100m below guidance given in February.
Budget blowouts are by no means uncommon in the construction industry, but Fletcher Building is a large publicly listed company and investors punished it accordingly.
Cheered by the construction boom, investors pushed the share price to above $11.00 in September last year. But yesterday its shares were trading around $7.45, falling nearly 8 per cent on the previous day.
Fletcher’s chairman Sir Ralph Norris took pains to point out that the multi-pronged business is on track in most of its divisions, which include housing development, building products, Formica and Laminex, and several other international operations.
The construction division – which includes the troubled building and interiors division – is expected to be back in profit by 2018.
But two profit downgrades in 12 months is a bad look, especially as yesterday’s announcement also unveiled a writedown of around $220m on its slower-growing Iplex Australia and Tradelink businesses.
In a briefing yesterday, Fletcher said it was likely to turn its attention much more towards the fast-growing infrastructure sector, and offered assurances that it had much better oversight over its workload.
It would also be much more cautious about the construction jobs it takes on.
But former Fletcher’s executive Paul Keane said that for a while at least, the company would have to endure some scepticism from construction customers.
‘‘From a client point of view, people will now be saying, ‘can you complete, and is this price you’ve given us robust’?’’
However, Fletcher’s problems reflected the wider industry, Keane said.
Taking contracts at fixed prices was a risky business when there was a shortage of skilled workers and soaring building material prices. Managing sub-contractors was also a serious issue.
A main contractor like Fletcher had its ‘‘head on the block’’ if a subcontractor failed to deliver, Keane said.
Analysts said the onus was on Fletcher to restore confidence, and that started with the new chief executive.
One name being floated is Mark Binns, a former Fletcher senior executive who has indicated he will resign from his current job at Meridian Energy at the end of the year.
Ward said Binns was well regarded but it was presumptive to throw names into the ring.
And he had some sympathy for Adamson who ‘‘might have some straight-up forthright views, but the rest of the business is doing well’’.
Both he and Keane said Fletcher’s board could not be absolved from some responsibility for its situation.
‘‘There must be some soulsearching from the board downwards,’’ Keane said.