Wednesday 22nd February 2017
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Fletcher Building shares fell after the company posted a 2 percent gain in first-half profit that included unexpectedly weak earnings from its construction division that included a loss in the "tens of millions" on a major contract.
Gross revenue from construction jumped 54 percent to $1.15 billion in the six months ended Dec. 31, making it Fletcher's second-largest business after distribution, but operating earnings fell 33 percent to $24 million, of which $23 million came from Construction South Pacific and New Zealand contributed just $1 million to earnings.
The shares fell 4.5 percent to $9.75 on the NZX today, having soared 54 percent in the past 12 months, more than three times the pace of the S&P/NZX 50 Index. Fletcher stock has outperformed on optimism it would benefit from a boom in Auckland residential construction, which the company confirmed last August by forecasting a lift in 2017 full-year earnings before interest, tax and significant items of as much as 11 percent. It affirmed that $720 million to $760 million guidance today.
The disappointing construction result "was an unwelcome surprise for the market today," said Rickey Ward, New Zealand equities manager at JB Were New Zealand Equities. The fact that Fletcher reiterated its full-year guidance "should be a plus" because it points to a stronger second half, he said.
The construction division's earnings included a $19 million contribution from the Higgins contracting business, acquired last year, which Ward said was "well ahead of expectations".
Fletcher said the reduction in construction earnings was "due to a range of factors, notably: timing of earnings recognition for major projects; bid costs incurred in the period; reduced contribution from Fletcher EQR as the Canterbury earthquake home repair programme nears completion, and losses incurred on a major construction project."
It didn't identify the major project but chief executive Mark Adamson said it was "in the order of tens of millions" of dollars. Accounting standards meant the company had to account for all the projected losses in the first half. It was a project management issue "and we now have our arms around it," he said. A major project was one of more than $150 million.
As at Dec. 31, the backlog of construction work awarded but not completed stood at $2.7 billion, down from $3.3 billion a year earlier. Adamson said the previous year had been unusually high, with plenty of work won and still projects to be completed.
"We would not expect it to be at that level for a prolonged period of time," he said.
The strongest performance came from Fletcher's distribution division, which includes building supplies such as the Placemakers and Mico stores, and steel distribution. Operating earnings jumped 31 percent to $84 million, led by NZ building supplies and steel. Revenue climbed 2 percent to $1.64 billion.
Its international division, which includes Laminex and Formica, recorded a 32 percent gain in first-half operating earnings to $70 million, although gross revenue was 7 percent lower, largely reflecting the strength of the New Zealand dollar, it said.
Earnings from building products, which includes concrete pipes, cement and aggregates, building materials and plastic pipes fell 2 percent to $129 million on a 12 percent decline in gross revenue to $1.1 billion. The result reflected loss of sales from divested businesses, Pacific Steel and Rocla Quarries, and costs for plant closures at Rocla and Fletcher Insulation, it said.
Fletcher Building's cash outflow from operations was $67 million compared with a cash inflow of $170 million a year earlier.
Net profit was $176 million in the six months ended Dec. 31, from $172 million a year earlier, it said. Sales rose 4 percent to $4.61 billion. Excluding one-time items, profit rose to $187 million from $159 million and both sales and normalised profit were below the forecasts from brokerage Forsyth Barr.
Fletcher's building products division, its largest business, had a 12 percent decline in revenue while operating earnings dropped 20 percent including $15 million of costs for the closure of Rocla Products and Fletcher Insulation sites, and reflecting lower sales after the divestment of Pacific Steel and Rocla. Operating earnings from construction fell 33 percent, which it said reflected "losses on a major project".
It declared a first-half dividend of 20 cents a share, fully imputed, up 5 percent from a year earlier. Forsyth Barr was expecting a dividend of 21 cents.
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