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Ellerston Capital, with interest in 5.1% Fletcher stake, sees builder as a turnaround story

Monday 16th April 2018

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Ellerston Capital's interest in Fletcher Building has topped 5.1 percent, requiring the Australian fund manager to make a statement to the ASX and NZX but its interest in the beat-up construction and building materials company has been no secret.


Ellerston holds Fletcher in at least two of the funds it manages. In its Ellerston Australian Share Fund, the firm name-checks Fletcher as one of three turnaround stories - "sound businesses that have historically generated poor returns or under-earned versus their potential, are in transition and where we think earnings/returns will improve over the medium term".


The fund manager, which oversees about A$5 billion in investments, also holds Fletcher for its Ellerston Australian Market Neutral Fund - one of two investments in the building materials sector that it holds along with Adelaide Brighton. Ellerston has been buying Fletcher in the face of the company's ongoing bad news. "We added to our pair within the building materials sector, with both Fletcher Building (-5.1%) and Adelaide Brighton (- 3.0%) underperforming the broader market," it says in a March fund report.


Fletcher shares surged on Friday after a report that Wesfarmers might be building a stake, with the shares possibly being warehoused by a third party with the intention of making a more substantive offer. However, Fletcher said on Friday it knew nothing about the report. The stock advanced 2.5 percent to $6.50 in early trading today and has fallen 17 percent this year.


"Ellerston are an active, value-focused investor – with Fletchers trading at its lowest stock price since 2010 I am not surprised to see a value-focused fund adding to existing investments," said Shane Solly, a director at Harbour Asset Management. "I don’t know the details behind the entities but some may relate to funds managed by Ellerston in the same way that all fund managers manage their clients investments."


Fletcher slumped to a $273 million loss in its first half, driven by losses at its Building + Interiors unit, and chief executive Ross Taylor has embarked on a strategic review of the entire company, with details to be announced in June. It had to get waivers from lenders after breaching covenants and is still in talks with its US noteholders and bank syndicate to negotiate new lending terms.


That's led to speculation the company could shed non-core businesses although Taylor has said the problems are largely confined to B+I and the remainder of Fletcher's building products, distribution and construction units are performing to budget.


Chairman Ralph Norris announced in February that he was stepping down to take responsibility for the losses and provisions and in a letter to shareholders that month he said: "As you are aware, Fletcher Building is a diversified building company, comprising more than 30 businesses with operations that span the entire building supply chain. The majority of these businesses are performing well, and are benefiting from supportive market conditions."



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