Fletcher Building looking for solutions after flagging more losses

Thursday, 8 February 2018

Fletcher Chairman Ralph Norris says the company's 'bad experiences' have taught him to not take people's views at face value.

Construction giant Fletcher Building is unlikely to fail but may well be forced to sell an asset to cover its losses, an analyst says.

The company shares have gone into a trading halt on the NZX and ASX, with a warning that more losses were expected in its building and interiors unit, which would breach one or more of its banking covenants.

A KPMG review of Fletcher's finances in October forecasted a $160 million loss, after major cost blowouts in the previous financial year on two key projects, SkyCity's New Zealand International Convention Centre (ICC), and the Christchurch justice and emergency services precinct.

Construction giant Fletcher Building shares are on halt until Monday.

Fletcher Building told shareholders on Thursday morning that although the review was still ongoing, the losses were going to be larger.

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'Once the extent of those further losses is determined and provided for, it is expected that this would result in a breach of one or more of the covenants in the group's financing arrangements.'

The trading halt is expected to be lifted when sharemarket opens on Monday. Details of the review will be made public before then.

Grant Davies, an analyst with brokerage Hamilton, Hindin Greene, said that 'obviously breaking your banking covenants is a big deal and they'll have to come up with a way to shore up their balance sheet one way or another'.

The company might strike an agreement with its banks or sell a business, and the degree to which investors punished the company depended on the solution.

He said the shame of it was that most of the wider business - in infrastructure, building supplies and residential construction - was running well.

'I don't think there's a risk of Fletcher Building going to the wall. Ninety per cent of the business is functioning quite well.'

Fletcher was a company which had bought and sold businesses quite regularly in the past, Davies said.

'You get the feeling … the parts are greater than the sum of those parts, and there's certainly some high quality businesses within the stable that they've got.

'It's just there's one business unit in particular that's been dragging the business down over the last 18 months.'

Fletcher did not say whether whether it was considering selling its building and interiors division, but rumours have swirled for months in Australian investment circles that potential buyers were looking over its assets.

It was reported last month that Spanish company Acciona, which is already a partner in some of Fletcher's infrastructure projects, was reportedly interested in buying Fletcher Building.

Other potential buyers could be one of a number of Chinese construction companies climbing into the New Zealand market.

At the company's annual general meeting last October, chairman Sir Ralph Norris was asked if asset sales were on the cards.

'I don't want to name businesses we may divest,' he told the Australian Financial Review.

But the paper suggested that Fletcher's laminates manufacturer Formica could be one of the first assets on the block.

Its construction division, to which the building and interiors arm belongs, is a relatively small part of Fletcher's overall business, valued at about $206m.

The company's big money is in building products ($3.3 billion), followed by its international businesses (including Laminex and Formica) and its distribution business.

Greenstone Group property consultancy managing director Phil Eaton, said the entry of new competitors might not be a bad thing given how stretched the market was .

'The market needs more experience and it needs some fresh blood and clearly the construction market is struggling with costs, so anybody who can bring some more vertical integration from overseas would be welcome in the market.'

One of the industry's biggest challenges was finding skilled workers, not just builders but managers, quantity surveyors and architects, he said.

Another more general risk is the ever-present danger of cost-overruns and late penalties. According to industry sources, the increased use of fixed-use contracts which force the construction company to bear the brunt of design or logistical problems has become a real strain.

SkyCity could not say on Thursday if the convention centre was on track because it was in a blackout period ahead of releasing its half-year financial results for the six months to December on Friday.

Norris told Stuff in October that the troubled B&I division had caused the company 'a whole lot of grief' but that he felt he had an obligation to fix what was one of the worst situations he had faced in his business career.

He said the company's former executives 'should have been on top of many of the issues that have led to what has actually happened'.

Former Fletcher Building chief executive Mark Adamson left in July, shortly after the company's cost blow-outs were made public, and the former head of the buildings and interior business Greg Pritchard was reportedly 'released' in September last year.

New chief executive Ross Taylor, formerly of engineering consultancy UGL, started in November.