Sharechat Logo

Fletcher open to re-entering high rise construction market

Wednesday 20th February 2019

Text too small?

Fletcher Building chief executive Ross Taylor has opened the door to taking on new high rise projects because of promising signs that contract terms may improve and says he will make a decision by about the middle of 2019.

In February last year, Taylor said Fletcher would complete its remaining Building + Interiors projects, the division dealing with high rise projects, but wouldn’t be bidding for new work because those projects were both high risk and low margin.

Announcing that decision was immediately attacked at the time as a mistake – not the withdrawal from the market, but making it public – because that would immediately make it harder to retain the staff needed to complete committed projects.

But during a conference call with analysts about Fletcher’s first-half result, Taylor indicated market conditions appear to be changing.

“What we’ve seen, roll forward 12 months, is there’s now an industry working group with government, which we’re participating in, across construction broadly where they’re working on altering risk and contract terms to make them more reasonable,” Taylor said.

“That’s been a reaction to a number of the failures of local companies,” he said.

“We’ve also seen as other competitors look at how they approach some of these things, it’s been relatively consistent and good industry pushback now where clients are accepting that they can’t offload that.”

That means contract and margin conditions are changing.

There’s also “a concern that’s emerging in the market of clients having to think a bit differently about this, if they want to have an industry that actually responds to their projects,” Taylor said.

“We haven’t made a call on that yet. I just want to see where all that runs, but certainly it has piqued our interest,” he said.

“The other dynamic for us is, as we’re getting to a smaller number of projects that we’ve got to finish, we’ve got some really good skills there, so my inclination is, if those background dynamics change and we’ve got really good teams with really good skills, then we should put them to good use.”

A year ago, Fletcher had 16 B+I projects to finish and Taylor says that’s now down to eight. He is forecasting that seven of those will be finished in calendar 2019 and the last – most likely the SkyCity Convention Centre and hotel – will be completed in 2020.

Yesterday, Precinct Properties, which owns the Commercial Bay project at the bottom of Auckland’s Queen Street which Fletcher is building, said there has been “minor slippage” of about a month to the construction programme “which may impact previously disclosed completion dates of September 2019 for retail and December 2019 for office.”

Taylor said Fletcher is contractually bound not to comment on matters such as completion dates and “sometimes customers get ahead of us in their market announcements” but that his company is still working to the existing schedule unless Precinct changes that. 

Fletcher will have to clarify its thinking about the vertical, or high rise, market before it makes any decision to bid for new work, he said.

“We’ve got to make that call really by the time we get to the middle of this year. Otherwise, we will wind all the projects down and we will lose the teams, so we have a sort of window where we need to think about that.”

Earlier today, Fletcher reported an 8 percent fall in first-half operating profit, a smaller decline than what it warned shareholders to expect at last November's annual meeting. 

The company has revised its guidance for the full year upwards a little.

Net profit in the six months ended December was $89 million compared to the $273 million net loss it reported for the same six months a year earlier.

Earnings before interest and tax were $285 million in the latest six months compared with $309 million in the year-earlier period before losses from its high-rise-building unit, which dragged the year-earlier result to a $322 million ebit loss.

Fletcher now expects full-year ebit, before one-offs and assuming a full year of earnings from Formica, will come in between $650 million and $700 million, a $20 million lift from its November guidance. The company says that reflects the treatment of the Formica business as “held for sale”, so there was no need to depreciate its assets.

The US$840 million sale of Formica was announced in December.

While Taylor described the New Zealand results as “solid,” apart from the 42 percent increase in Formica’s ebit, there were scant increases in earnings from the divisions it is keeping and a number of minor ebit falls. Its Australian ebit fell 38 percent to $33 million.

Taylor said poor market conditions in Australia, particularly higher costs and a declining residential construction market, meant that Fletcher has had to look at lot harder at those businesses.

The company has a number of “self-help” measures under way to improve the Australian businesses and position them better for 2020, he said.

On Tuesday, Precinct said it has withheld $15.4 million from Fletcher in liquidated damages as at Dec. 31 and chief executive Scott Pritchard said he expects that amount will grow. Last week, SkyCity said it has withheld $39.5 million of liquidated damages from Fletcher on the convention centre and hotel projects.

Last year, Fletcher refused to confirm or deny that the SkyCity contract caps liquidated damages at $40 million.

Fletcher has made no change to its overall provisions for the B+I losses but it has changed the expected cash flow. Some $50 million that had been expected to crystalise in the year ending June is now booked in the 2020 financial year, presumably because of project delays.

Taylor would not say whether the provisions include the liquidated damages being withheld on the SkyCity and Precinct projects but warned that “you shouldn’t read into their (customers’) comments any acceptance or otherwise from us” about the amounts being withheld.

“We will be looking to pursue our rights,” he said.

(BusinessDesk)

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


  General Finance Advertising    

Comments from our readers

No comments yet

Add your comment:
Your name:
Your email:
Not displayed to the public
Comment:
Comments to Sharechat go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.

Related News:

Briscoe Group says outlook uncertain
FMA, RBNZ disappointed by life insurers' response; $1.4m of issues found
Steep rate cut may have spooked households - Westpac
Veteran media exec Joan Withers joins Sky TV board
Contact hires Refining NZ CEO to replace Barnes
17th September 2019 Morning Report
NZ dollar weaker after Trump authorises use of emergency crude stockpile
Govt minerals strategy poses 'significant' risk to security of supply - Enerlytica
Z, BP, Mobil dragging chain on secure Auckland jetfuel supply - review
MARKET CLOSE: NZ shares fall; high oil prices weigh on Air NZ, Mainfreight

IRG See IRG research reports