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Fletcher stock drops 13% as Norris steps down, B+I provision increased by $486M

Wednesday 14th February 2018

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Fletcher Building shares tumbled 13 percent after the company said Ralph Norris will step down as chairman in the face of a further $486 million provision for project losses at its Building + Interiors unit where 14 of the unit's 73 projects, worth $2.3 billion, are loss-making or 'on watch'.

Fletcher shares dropped $1.03 to $6.74 when they resumed trading this morning after being halted last week for the announcement. They have tumbled 23 percent in the past 12 months. The projected 2018 loss for B+I has been widened to $660 million on an earnings before interest and tax basis from a previous estimate of $160 million, while guidance for group ebit excluding B+I was reiterated at $680 million to $720 million. 

Norris is to step down at the 2018 annual meeting toward the end of the year, having presided over a board that dumped former chief executive Mark Adamson after profit warnings that were driven by problems at B+I. New CEO Ross Taylor, who conducted a review of Fletcher's strategy after taking the job last November, said the new provisions "was informed by a review of 16 B+I projects, accounting for about 90 percent of the construction backlog." 

Investors said the question now is whether Fletcher has quantified the extent of losses related to B+I with the latest provisions. 

"We would think that the size of it might lead to more confidence they're putting a final cap on losses from that division," said Nick Dravitzki, an equity analyst at Devon Funds Management. "It's sensible for this new CEO to be looking to put this to bed as soon as they can."

Still, with the single biggest loss coming from the Convention Centre contract at $410 million, which is only 22 percent complete as a percentage of the estimated $400 million to $500 million contract value, "you would be a brave individual to say there's not a chance for further downside," Dravitzki said.

B+I was now focused "on project delivery only" and was "ceasing all bidding on vertical construction projects in New Zealand," Taylor said. "While our broader construction businesses continue to benefit from favourable market conditions and strong growth, the B+I sector remains characterised by high contract risk and low margins. Unless these dynamics change we will no longer work in this sector."

A $20 million restructuring provision to exit B+I has also been recognised, with key resources to be redeployed to other construction division businesses as B+I projects are completed. B+I had a contract backlog of $926 million, the biggest for any unit in Fletcher Construction, and the contracts  are predominantly fixed-price or guaranteed maximum price

Fletcher said it has obtained a waiver from its commercial banking syndicate after breaches the terms of its loans. Taylor said the strength of Fletcher's remaining business and the phasing of the cash impact of the B+I provisions "meant the company remains well capitalised and solvent."

The cash-flow impact of the B+I losses has been spread over four years. As at Jan. 31, the company had borrowing'headroom of $1 billion and said net debt is forecast to increase by about $250 million this calendar year. net debt stood at $2,.1 billion with $173 million of cash on hand.

The B+I losses breached four lending covenants relating to ebitda against debt and interest payments. It has gained a waiver from its bans on the condition that new covenant terms are agreed by March 31. Fletcher said it is in talks with holders of its debt issued in the US private placement market and expected new covenant terms to be agreed by the end of March, meaning all of its funding lines would be re-negotiated by the end of next month.


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