Rising debt to hit Fletcher result, analysts predict
Fletcher Building’s interim result next week is forecast to fall 9 to 17 per cent with analysts tipping lower dividends and rising debt levels after $180 million construction division provisioning announced on Monday.
Forsyth Barr’s Rohan KoremanSmith and Paul Koraua forecast the company to say next Wednesday it made $299m ebit before significant items in the six months to December 31, 2023.
That 1H24 result will be down 17 per cent on the previous corresponding 1H23 result, they say, although others forecast a drop of 9 per cent.
Debt levels will hit a top threshold and shareholders could suffer.
“The ultimate cash cost will see gearing reach the top end of Fletcher’s target range and we expect a reduction in dividends and cuts to the growth capex pipeline at its upcoming 1H24 result to provide some headroom,” their February 7 report said.
Gearing would be at the top end of Fletcher’s target range which would leave little room for further cost overruns or additional costs from the West Australian Iplex pipe issues.
Fletcher chief executive Ross Taylor has blamed exploding pipes on poor installation and workmanship. Perth builder BGC blames exploding pipes on manufacturing problems.
Fletcher hasn’t provided a 1H24 earnings guidance but divisional trading comments from October indicated residential sector volumes were softer than expected.
Simplicity is calling for Fletcher’s board and management to be scrutinised further after the share price dropped following the $180m cost blowout on two big projects in Auckland and Wellington.
Managing director Sam Stubbs told Newstalk ZB on Wednesday he had called for the chair’s resignation two years ago and no action was taken.
“In those two years, the directors paid themselves $4 million in feesand then they had the absolute cheek last year to ask for a 25 per cent pay increase, which they were ultimately talked down from,” Stubbs told Heather Du Plessis Allan Drive.
Jarden’s Grant Swanepoel and Luan Nguyen called for an update on the Iplex “saga”, after Taylor refused to provide any new information to Swanepoel in Monday’s analysts’ briefing, citing instead continual disclosure which meant he had nothing new to say.
“We wait a potential decision on fault for the Western Australian IPLEX saga. Early indications are that a recall/non-recall decision could be announced as early as March, so some time to pass before the dust can settle on non-organic value issues,” the Jarden analysis said.
“Fletcher Building has many writedown risk issues, none larger than the Iplex saga. We believe giving an update on extra write-downs just nine days ahead of its interim result and not including commentary on this issue did not help investors form a view on the extent of the current value destruction potential,” the Jarden analysts wrote.
With Western Australian consumer protection having narrowed its focus on the Typlex product from 2017, and looking for anyone who has been injured, had a ceiling collapse or had water coming through the light fittings, it appears to the Jarden analysts as though the case for the minister is close to completion.
The Herald reported how a Western Australian government department’s consumer safety division is seeking information about injuries in Perth homes with Iplex pipes. The Government of WA’s Department of Mines, Industry Regulation and Safety has sought details of cases where ceilings have collapsed, water has come through electrical sockets or light fittings or people have sought medical attention.
The Jarden report issued on Monday, February 5 was headed “trapped by continual write-downs and provisions”.
“History of recent write-downs have all be surprises,” it said citing $150m provisioning in December 2022, $16m in April last year, a further $105m last August, then Monday’s $180m from extra costs from the NZ International Convention Centre and car parks for Wellington International Airport. All up, that’s $451m of surprises from Fletcher.
Cameron Parker and Ryan Li, of Craigs Investment Partners’ February 5 report, headed “weight of one’s legacy”, referred to the $180m provisioning.
The Craigs’ analysts named many problems:
• Ongoing uncertainty with the NZICC with around 10 months to run until it is finished.
• No agreed solutions for problems with Wellington International Airports’ car parks dispute.
• Claims on the Pūhoi to Warkworth motorway project of around $200m of which Fletcher’s share could be half.
• No visible way forward on its Iplex pipe issues in Western Australia, including any decision from the regulator.
These difficulties had all created a drag on the share price, the Craigs’ analysts said. It estimates $327m 1H24 ebit before significant items, down 9 per cent on 1H23. The contraction in earnings will mainly be driven by a sharp decline in residential margins and volumes for the New Zealand residential and materials and distribution businesses, as the housing market softens.
On a positive note, the Australia division appears to be resilient and NZ materials pricing stayed strong, as Fletcher said last year at the annual meeting.
Some insiders say the Iplex exploding pipe issues worry them the most, as its effects on Fletcher are so unknown. “The more important question for Fletcher is can the West Australian [Commerce Minister Sue Ellery] allocate blame and cost or does a recall then go to arbitration or the courts? Is there any recall precedent? Has Fletcher got recall insurance?,” one expert said.
A Fletcher spokesman said this week: “We’ve received no reports of any injuries and won’t comment on the regulator’s investigation.”
Shares on the NZX were trading midday on February 8 at $4.19, down 23 per cent annually.
History of recent writedowns have all been surprises. Jarden report