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Analysts pan Fletcher results, one comparing it to Fonterra

Monday 26th August 2019

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Fletcher Building managing director Ross Taylor’s hopes that the market will recognise his achievements to date have been dashed.

Analysts have panned the 2019 annual results, albeit that they were well-signalled, with some cutting their forecasts for this year.

Grant Swanepoel, an analyst at Craigs Investment Partners, has shaved $17 million off his current-year forecast and now expects earnings before interest and tax to come in at $513 million from $631 million in the year just gone.

“Despite good underlying conditions in New Zealand, Fletcher’s domestic divisions lack growth,” Swanepoel says.

He had estimated core NZ earnings would be $485 million but they came in at $479 million, down 9 percent from the previous year.

Fletcher’s domestic markets are at “elevated” activity levels, the company says.

Forsyth Barr analyst Matt Henry said the results served to "re-emphasise a few of our concerns,” including margin pressure and scepticism about whether the company can turn around its Australian operations “when the environment is only getting more challenging.”

Residential building consents in Australia fell to 185,000 in the latest year from 232,000 the previous year and Fletcher expects them to fall to 150-160,000 in the current year.

Swanepoel estimates about 67 percent of Fletcher's Australian operations are exposed to the residential market.

Henry’s forecasting ebit of $505 million for the current year while Arie Dekker at Jarden, who has a $502 million ebit forecast, is drawing parallels to Fonterra as he flags the growing risk of further construction losses.

He noted the poor performance in Australia and the company’s inability to leverage the strong New Zealand building sector.

“We wonder whether complexity and a lack of transparency and accountability is contributing, seeing some parallels with Fonterra.”

He suggests there are still areas of the broad NZ businesses “where the upside is insufficient for the risk and distraction that comes with it,” suggesting some parts of the business could benefit from “more specialist governance.”

Dekker is also questioning the strategy in Australia – Australian ebit margin is just 1.9 percent but the company is aiming to lift that to 7 percent by the year ending June, 2023.

“We have questions about Fletcher’s right to put one-third of capex into Australia," he said, adding that visibility on the quality of investment outcomes is likely to be low.

Fletcher expects capital spending to be $275-325 million in the current year.

“It is not at all clear that there has been genuine introspection by Fletcher with regards the exit of Australia,” Dekker says.

The plan to invest a third of capex in Australia “was not accompanied by a clear outline of where that investment was going with investors having little confidence that they will be able to track outcomes to it,” he says.

“Certainly, a clear and open outline on the rationale supporting more investment in Australia over divesting has not been presented either.”

BusinessDesk has estimated that Fletcher has written off well over $500 million from investments in Australia since it was spun out of the Fletcher Challenge group in 2001.

Dekker says continued delays to the legacy construction projects suggests an increased risk of further losses.

Taylor was widely viewed as having “kitchen sinked” the construction losses after nearly $1 billion in losses were brought to book in the 18 months ended June 2018.

The major projects still to be completed are the SkyCity convention centre and hotel in Auckland and the Commercial Bay development at the bottom of Queen Street in Auckland. Recent comments from these projects’ owners suggest completion will drag on well into 2020.

Four other projects remain to be completed, including the Novotel hotel at Christchurch airport, which is currently accepting bookings for November of this year.

At the time Fletcher announced the last lot of construction provisioning in February 2018, it had expected all projects to be completed in the year just gone.

“While Fletcher maintains the party line with respect to the accounting losses, the reality for investors is that the further delays on these two key projects have a real cash cost and any upside to previously forecast cash losses, to the extent that it may have existed, becomes increasingly unlikely,” Dekker says.

Fletcher provided details of the ongoing cash impact of the construction losses. From $168 million in financial 2017 and $285 million in 2018, they had a further cash impact of $257 million in the year just gone and are forecast to cost $257 million in the current year.

Dekker also questions Fletcher’s decision to re-enter the high-rise construction market, “given the low margins and core areas Fletcher could focus on.”

Taylor has said the company expects to be able to achieve 3-4 percent ebit margins from vertical construction projects in the future.

Henry sees a bleak future: “We believe Fletcher will likely disappoint market earnings expectations again” in full-years 2020 and 2021.

One of the few positives analysts drew from the result was the lack of new bad news - the result was well-flagged in advance. 

Taylor says the company is making great progress, with the construction business stabilised and having staged a “solid intervention” to get the Australian business on track to deliver better results over the next few years.

“Through all of that, we kept our New Zealand businesses on track and they’ve performed” and Fletcher has also reduced debt and reinstated dividends. It will pay a final unimputed dividend of 15 cents per share, taking the annual payout to 23 cents.

“It was a very solid and successful year for Fletchers from where it was a year ago,” Taylor says.


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