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Fulton Hogan profit drops on troubled Australian projects, slowing NZ work

Tuesday 19th March 2019

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Fulton Hogan's first-half profit dropped by a third as the privately-held civil construction firm struggled with problematic projects on the other side of the Tasman. 

The Christchurch-based infrastructure and construction group reported a pre-tax profit of $70.6 million in an update to shareholders, blaming the decline on several legacy construction projects in Australia.

Fulton Hogan noted those projects in its annual report last year, saying at the time that they were taken on in a highly competitive environment and that the board was considering all options to reduce the company's risks. 

In the latest update, chair David Faulkner and managing director Cos Bruyn said those projects were at a stage where the final cost could be reliably assessed. 

"Our half-year results reflect the conservative approach taken with respect to both cost and claims recognition," they said. 

Graphs in the company's update show first-half Australian revenue rose to more than A$1.25 billion, while New Zealand revenue was flat at less than $1 billion. 

Faulkner and Bruyn also noted increasingly competitive market conditions in Sydney and slowing activity in Canterbury and Kaikoura among reasons for the weak half. 

They also blamed the New Zealand government's new funding priorities for slowing New Zealand Transport Agency work programmes and adding uncertainty to local authorities. 

In its 2018 annual report, Fulton Hogan flagged this financial year would be a tough one, something it reiterated in the latest update. 

"Volatility and uncertainty remains in many of our key markets, which has, and will continue to, impact on results," Faulkner and Bruyn said. 

"This is contracting, the business has to adjust and flex accordingly to maintain acceptable shareholder returns whilst at the same time retaining our long-term focus." 

Faulker told shareholders in a letter accompanying the update that the problematic Australian products and the uncertainty and delays created by the New Zealand government's new priorities weighed on the board's confidence in ongoing earnings. Because of that, the board has lowered the buyback price offered to $14.40 a share from the September 2018 price of $14.90. 

Fulton Hogan's board declared an interim dividend of 24 cents per share, down from 25 cents a year earlier. 

The company bought Stevenson Group's construction materials unit last year for about $300 million, and the latest update shows its net debt has climbed to almost $700 million at a gearing ratio of more than 40 percent. 

Faulkner and Bruyn said the company will focus on integrating the Stevenson business and reducing its debt profile, with a focus on "achieving better bottom-line results than the pursuit of unprofitable revenue". 

The company is paring back its Fijian unit after losing its road maintenance contracts. Fulton Hogan is reassessing its long-term presence in the Pacific "given the pricing behaviours of other foreign contractors who operate within the region," they said. 

New Zealand head Graeme Johnson said the new transport priorities for the government meant there was a range of smaller regional construction projects coming to market, and upgrades to water infrastructure were also likely to create opportunities for Fulton Hogan at some time in the future. 


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