It’s a ‘trifecta of despair’
Three building sector companies struggling despite NZ’s construction boom
First there was Fletcher Building, then there was Steel & Tube and now Metro Performance Glass — all three involved in the building materials sector that have managed to disappoint in the midst of a construction boom.
It’s what Castle Point Funds Management partner Stephen Bennie calls the New Zealand building sector’s “trifecta of despair”.
“What’s been so deeply unimpressive with Fletcher Building, Metro Performance Glass and Steel & Tube is how they have turned what should have been peak cycle earnings into peak corporate carnage,” he says.
Both Fletcher and Steel & Tube had managed to impair their balance sheets during the building boom.
“In the case of Fletcher, they did this so badly that they were forced to hit shareholders with a deeply discounted rights issue and put various divisions up for sale,” he said.
In February’s first half result issued in February, Steel & Tube said: “CFDL and S&T Plastics are both performing well.”
Three months later, the company said it was preparing to exit S&T Plastics and was expecting a net writedown of up to $12 million.
“This is more a question of credibility than materiality, but it’s still far from pretty,” Bennie said.
He questioned whether Steel & Tube should raise fresh capital, given what it said was a likely breach of its banking covenants.
“As Fletcher Building proved, the longer you wait, the lower the share price and the bigger the discount for the rights issue,” he said.
Steel & Tube now expects normalised ebit of about $16m, excluding non-trading costs and impairments of up to $54m, resulting in an ebit loss of about $38m for the June year.
In Metro Performance Glass’s case, its earning before interest and tax fell by 9 per cent to $30.9m, which the company said was disappointing.
ANZ still exploring
ANZ Bank is still mulling its options for its finance company arm, UDC, contrary to reports across the ditch that its initial public offer (IPO) has gone cold.
“ANZ continues to explore possibilities and strategic options in relation to UDC, including a potential IPO,” the bank said in a one-line statement this week.
A report in the Australian said ANZ is believed to have shelved the initial public offering plans for its UDC Finance division until next year, with some questioning if the deal could be off for good.
The paper said complexities surrounding an IPO have been cited for the suspension of the float that was to be handled by Deutsche Bank. NZX-listed Heartland Bank, and Blackstone, Macquarie Group, or Latitude Financial — the latter backed by Kohlberg Kravis Roberts — and Japan’s Orix have been mentioned as possible buyers.
The sale of UDC to China’s HNA fell through last year when the deal failed to get approval from the Overseas Investment Office.
Not so sweet
Comvita will take another two years to reach its $400m sales target after the manuka honey company had two poor seasons in a row, according to Craigs Investment Partners.
The brokerage downgraded its recommendation on NZX-listed Comvita to “hold” from ”buy”.
New Zealand’s largest natural health products company last month lowered its forecast for annual earnings, citing adverse weather in the second half of the 2018 honey season that cut volumes.
That followed what it called an “extremely poor season” in 2017. Comvita’s shares had held up following the latest downgrade to earnings as investors waited to see if a potential merger went ahead.
But the stock has fallen sharply since the company said on Monday it had pulled out of the talks after failing to reach a deal on price.
That’s prompted investors and analysts to reassess the company’s prospects, with Craigs cutting its profit forecast and rating on the stock.
“We continue to like the Comvita investment thematic, of becoming a more reliable premium-branded manuka honey vertical targeting the Chinese consumer,” Craigs research analyst Adrian Allbon said in his report titled “Poor end to a sticky situation”.
However, he cut his outlook on the stock due to two consecutive short harvests materially impacting profitability and driving up debt, with a merger and acquisition premium now unlikely in the near term.
Management needed to re-focus on core bee products to lift profitability, he said.