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UPDATE: Fletcher shares gain on $300 mln buyback

Wednesday 26th June 2019

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Fletcher Building shares recovered some of yesterday's decline as the country's biggest listed construction company announced plans to buy back as much as $300 million of stock, with the bulk of the billion-dollar Formica sale proceeds being used to cut debt. 

The shares increased 0.4 percent to $5.35, and are up from as low as $4.57 in mid-March when investors were wary that Fletcher might re-enter the vertical construction segment where it lost almost $1 billion over an 18-month period. 

Fletcher is hosting investors in Sydney today and outlined its plans for the $1.24 billion it pocketed from the sale of its Roof Tile Group and Formica units.

The proceeds will go some way to strengthening the balance sheet, and chief executive Ross Taylor told a media briefing that the company can buy back stock now, given its in a very different place from when it raised $750 million last year. 

"We've done what we said we would. We are much stronger and in a much more robust place," he said. 

"As we look at share price today, we're comfortable it's the right thing to do." 

At yesterday's share price of $5.33, the buyback will purchase about 56.3 million shares or about 6.6 percent of the company's total stock. 

Fletcher plans to repay an additional $600-$650 million of debt during the coming financial year, leaving it with $1.1-$1.12 billion of drawn debt in June 2020. That's expected to cut its interest bill to $80-$90 million for the June 2020 year, from $130 million in the current period, according to presentation slides for today's meeting. 

The company's leverage ratio of debt to earnings is forecast to be below its 1.5-2.5 times range by the end of next year. Taylor said he's comfortable that the range is still appropriate. 

Grant Davies, an investment advisor at Hamilton Hindin Greene, said today's presentation backed up Fletcher's efforts to get back on track, with the de-leveraging prudent given its recent experience. 

"There's a long way to go but they're heading in the right direction," he said. 

Another $240-$250 million of the asset sale proceeds will go towards Fletcher's troubled projects in the Building + Interiors unit. The vertical construction division has been an albatross around Fletcher's neck during the past couple of years, but Taylor said it's now in a position to start bidding for new work as existing projects are completed. 

"We'll actively be in the sector talking to customers and looking for projects from now on," Taylor told media.

He doesn't expect any new projects to begin until later this year or early 2020, and the group will only take on work as its teams become free. 

"We aren't going to be looking to get every trophy project in New Zealand," he said. 

The buyback won't start until after Fletcher announces its annual earnings on Aug. 21. 

The company affirmed guidance for earnings before interest and tax of $620-$650 million in the year ending June 30, down from $710 million a year earlier. That forecast excludes a $145 million loss on the sales of Formica and Roof Tile Group and $100 million of restructuring charges.

Fletcher trimmed the top-end of its guidance earlier this month on the early settlement of the Formica sale. 

The company today said it expects softer market conditions in New Zealand and a contracting residential market in Australia for the 2020 financial year.

The New Zealand division remains Fletcher's profit centre, with an earnings margin of 11 percent and a strong performance from the residential and development unit in the current financial year. 

Taylor said Australia provides an upside opportunity, but has a weaker starting point to turnaround the business. It will deliver ebit of $55 million on $2 billion of revenue in the year ending June 30, a margin of just 2 percent. 

Fletcher has established a single Australian division and is targeting a 7 percent ebit margin medium-term. Taylor said he wants earnings from Australia to rise in what's likely to be a shrinking market for the next couple of years. The company plans to strip out $100 million of annual costs by the 2021 financial year. 


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