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Fletcher reiterated 'outperform' by First NZ as stock sinks to 2-year low

Thursday 15th February 2018

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Fletcher Building has been reiterated as 'outperform' by First NZ Capital as the stock sank to a new two-year low in the wake of the company's revelations of wider construction losses.

The brokerage did lower its price target to $8.40 from $8.50 in retaining its upbeat rating on the beleaguered company. Analyst Kar Yue Yeo said Fletcher chief executive Ross Taylor had provided investors with a sense that the company was "closer to the end of a difficult chapter in its history book." The shares fell 1.7 percent to $6.93, adding to the 9.3 percent slump yesterday after a trading halt was lifted.

"The proof in us giving Ross and his team the benefit of the doubt should begin to unveil themselves over the course of the next six to 12 months," Yeo wrote in a note today. First NZ's existing price target already factored in "a significantly negative valuation for B+I," he said, referring to the Building + Interiors unit of its construction division.

Fletcher is in talks with holders of its $1.13 billion of notes in the US private placement market having gained a waiver from its syndicated bank facility over $1.27 billion of debt. It has undertaken to agree new lending terms by the end of March. Yeo estimates new loan terms will add 50 basis points to the interest rates it pays, cutting $2 million from net profit in full-year 2018 and $7 million in 2019.

Fletcher cancelled its interim dividend yesterday but said a decision on its full-year payment hasn't been made yet. Cutting the final dividend would save the company $270 million in 2018, according to a Morningstar estimate.

First NZ's Yeo says he assumes the final dividend will be cancelled and that payments in full-year 2019 would amount to just 10 cents from the 41 cents of payments he had previously assumed. His 2020 estimate was lowered to 32 cents from 43 cents.

On that basis, he said, Fletcher's net debt would remain little changed for the next three years at about $2 billion "without equity raise or asset sale."

Taking into account the further $500 million losses and provision against B+I, First NZ now expects full-year earnings before interest and tax for Fletcher to fall to $40 million from $267 million in 2017.

Yeo said sentiment and lack of confidence will continue to weigh on Fletcher shares until Taylor and his team can show no further provisions are required at B+I. A key risk to that is the NZ International Convention Centre project, which is only 22 percent complete and has already suffered the biggest provisions of any contract at $410 million. Its completion date is August 2019.

"These risks are substantially reflected in FBU's stock price" given Fletcher shares are trading at a price-earnings ratio of about 11 times, Yeo said.

First NZ's revised forecasts for Fletcher over the next three years show no change to revenue, which is tipped to be $9.4 billion in 2018, rising to $9.8 billion in 2019 and $10.3 billion in 2020. Earnings get smashed this year with the bottom line forecast changed to a $61 million loss from the $293 million the brokerage had previously forecast. However, profits in the following two years were downgraded.

Its ebit margin swings to -2.9 percent in full-year 2018 from the 5.2 percent earlier forecast and compared to a margin of 4.6 percent in 2017.

Taylor told BusinessDesk yesterday that he expected to unveil a revamped business strategy for Fletcher by June, including "what bits, if any, we want to trim".

That prompted research firm Morningstar to publish a note that included making a case for the sale of Fletcher's Formica business as a non-core asset that was earning a low return and didn't provide much synergy with the rest of the group. Morningstar affirmed a 'hold' rating on the stock following yesterday's announcements but said the shares "now look attractive" against its fair-value assessment of $7.50.


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