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11/4/2018 — General
Fletcher’s market pain continues
By Simon Hartley

Confidence levels in Fletcher Building Ltd (NZX: FBU) remain low as its share price languishes near a decade-low around $5.85 - having shed $1.6 billion in market capitalisation in the past six months.

Accumulated and estimated losses from Fletcher's Building + Interiors (B+I) division over the past two financial years stand at $952 million, the lion’s share from the Auckland international convention centre and hotel and the Christchurch justice precinct.

After breaking banking covenants, Fletcher is at present in a second-waiver round of talks to renegotiate its banking terms, by the end of May.

The company is at risk of falling out of the NZX top 10 companies index, and the eight-company MSCI New Zealand index, which could prompt the exit of some larger institutional investors, while analysts continue to speculate on the need for a capital raising, alongside asset sales.

Fletcher is eighth in the NZX top 10 at $4.05 billion market capitalisation, Contact Energy ninth at $3.76 B and Air New Zealand tenth at $3.75 B.

Craigs Investment Partners broker Peter McIntyre said Fletcher would only have to lose about $300 M market capitalisation to be replaced in the top 10. That could prompt a “lightening” with some institutional investors exiting the stock.

“We've been positive on the stock, but in the past six months have become more neutral and are now beginning to lose patience,” McIntyre said.

New research on Fletcher from Craigs said for full year 2018 Fletcher now expected to make an earnings before interest and tax loss of $660 M, up from $160 M “just months earlier.”

During the past 13 years Fletcher had continued to buy offshore businesses, which had consistently failed to perform to the same standards as the original domestic operations, McIntyre said.

“Any business (Fletcher division) could potentially be for sale, at the right price.”

In recent years, NZ business had been performing “reasonably well,” because of the Christchurch rebuild, buoyant Auckland property market and higher national gross domestic product growth.

“More recently, the (NZ) construction business has been the primary driver of downgrades with the (Christchurch) justice precinct and Skycity projects (conference centre and hotel in Auckland) both incurring losses,” he said.

It was understood most of 14 B+I contracts were undertaken at a fixed contract price. Fletcher has quit bidding on large commercial projects, so as to complete the B+I projects, and continues in the residential and infrastructure sectors.

When Fletcher's predicament became apparent and began unravelling last year its chief executive Mark Adamson left immediately, and was replaced by Ross Taylor to undertake restructuring, while chairman Sir Ralph Norris resigned in mid-February; when the cumulative near $1 B losses were confirmed.

When asked about potential broker downgrades, McIntyre said the effects had been priced in already to targets, given the mid-February downgrade was the fifth in the past year.

“We're unlikely to see Fletcher in a `steady state' for some time yet and expect asset sales over the next 12-months.

“It's unsurprising that our confidence levels toward Fletcher remain low,” he said.

In the past six months Fletcher shares had traded at a high of $8.05 to a low of $5.74; having hit a high of $11.02 in September 2016.

“We remain cautious on the outlook with further losses possible; likely in the infrastructure or commercial projects and potential flow on impacts to other parts of the business,” McIntyre said.

*Simon Hartley is senior business reporter and assistant chief reporter for the Otago Daily Times.

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