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Fletcher sitting on $700M of for-sale assets with Formica, Roof Tile, says Morningstar

Wednesday 18th April 2018

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Fletcher Building's Formica and Roof Tile businesses are worth about $700 million and would sell at a higher multiple than other parts of the group, say analysts at Morningstar.


The company said yesterday it would exit its international division by selling Formica and its Roof Tile business to concentrate on its core building supplies, development and construction in Australia and New Zealand. Divestments could be stage 2 of a company revival led by chief executive Ross Taylor after the discounted entitlement offer, currently underway, raising a net $725 million and cutting net debt to $1.54 billion from $2.26 billion.


Fletcher reiterated its guidance for full-year 2018 earnings before interest and tax to be $680 million to $720 million, with the loss from its Building & Interiors unit affirmed at $660 million. Morningstar forecasts group ebit of $37 million after B+I but it expects a bounce back in earnings (before charges) to $797 million in 2019.


Taylor announced the balance sheet strengthening efforts yesterday but is waiting until June to give a full update from his strategic review, which is likely to see some restructuring. Between now and June 30 Fletcher plans to review its organisational structure, and "move to a leaner and more efficient centre", it said yesterday.


Fletcher drew down $280 million against its bank facilities in the first three months of 2018, pushing total bank debt to $714 million, the amount it now plans to repay through its discounted stock offer. A Fletcher spokeswoman today confirmed the drawdown, saying the funds "have been used for general corporate purposes."


Morningstar lowered its "no-moat" fair value for Fletcher shares to $7 from $7.50 in a note dated yesterday. They were at $6.27 before being halted for the offer, which is at $4.80 apiece, or a 23 percent discount.


"While we appreciate these transactions will lower the company's balance-sheet risk, the equity offer's steep discount to our fair value estimate dilutes shareholders more than we had anticipated," the analysts wrote. They lowered their "uncertainty rating" on the company to high from very high because of the balance sheet strengthening and recommended shareholders pick up their entitlement to the shares.


Morningstar wrote in February that it assigned Fletcher a poor stewardship rating because of "the track record of poor capital allocation over a number of years, organisational complexity that makes oversight challenging and weak risk controls that led to large losses in the construction division."


The firm said that "with fresh leadership under the new CEO, our assessment might be subject to revision in the future".


"We would need to see a credible strategic plan toward delivering higher returns and a set of measurable benchmarks against which progress can be assessed and management held to account, as well as evidence of exceptional corporate governance standards," they said in the report.


A high risk rating reflects the highly cyclical industry Fletcher operates in and a housing market in Australia and New Zealand that could be "at or very near a cyclical peak." There were also increased policy risks with the Labour-led government seeking to slow house prices and immigration, according to the report.


Even so, "Fletcher's cash flow generation has been very consistent over time, with most of the volatility in earnings coming from non-cash provisions and impairments," they said.



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