Why Fletcher Building wants to raise $700 million

Monday, 23 September 2024

Fletcher Building says market headwinds have weighed on its recent performance and the near-term outlook.

Fletcher Building has launched a $700 million equity raise to repay existing debt but its underlying position is sound, the NZX-listed company insists.

The raise, announced on Monday, was intended to strengthen the company’s balance sheet and improve its financial stability and resilience, it said.

It would involve a $282m fully underwritten placement with institutions led by Jarden, and a $418m offer to existing shareholders through the creation of new shares.

In a presentation to investors, company executives said market headwinds had weighed on recent performance and the near-term outlook.

Persistent inflation and high interest rates had affected housing demand, impacting on market volumes, and there had been a 30% to 40% decline in housing activity between the market peak and March this year.

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Management had targeted $180m of cost savings to be delivered in the 2025 financial year to partially offset the impact of inflation and market weakness.

But the company continued to execute its operational and strategic initiatives, including the appointment of new leadership team members, they said.

Balance sheet improvements were being fast-tracked with the signing of the Tradelink sale agreement, and the 50% sale of Fiji Construction, an in-principle agreement on the Western Australia leaky pipes issue which meant a product recall was off the table and progress on legacy projects.

Incoming group managing director and chief executive Andrew Reding said they were vigilant about further market weakness, and were aggressively targeting costs.

In the near-term, the outlook remained challenging, but the underlying businesses would be sound and well-positioned once market volumes recovered, he said.

“The equity raise is to further enhance our position and ability to withstand headwinds.

“We have a key focus on working capital and capital expenditure to make sure we are well positioned to respond to market conditions.”

In response to a question about the size of the equity raise, and whether it would be sufficient, Reding said they had looked at market volumes and were satisfied they had adequate headroom through 2025.

Incoming Fletcher Building chief executive Andrew Reding says the current weakness is cyclical, and there will be an upturn.

One analyst queried why the equity raise was needed, when Fletchers had said it would be exploring capital partnership options for residential and development when presenting its financial results last month.

Reding said that process was still under way, but he did not think there would be a quick conclusion, and the company would update on it accordingly.

When asked whether Fletcher Building businesses had lost market share over the years, he said he would challenge that perception, and would argue the businesses were in a strong position.

That included the insulation businesses, although Placemakers had some problems ‒ rising prices, shortages of some goods and production issues of Pink Batts among them ‒ and the company was targeting them.

The $180m cost-out was in response to the current weakness in the operating environment, he said.

“But we know it is cyclical, and we know there will be an upturn. So it would be wrong to take out capacity that we will need, and so we will not be cutting muscle.”

Fletcher Building acting chief executive Nick Traber said the capital raise would allow the company the time to do a proper re-evaluation of its portfolio, but it was too early to say what the outcome would be.

He acknowledged the market was waiting for an announcement on a permanent chair, but getting the right person was more important than the timing and they were undergoing a search, he said.

Fletchers has had a difficult year. In August it announced a $227m net loss for the year to the end of June, a sharp decline on the previous year’s profit.

Later in the month, it said it would record a loss of over $150m as part of the fallout from its Western Australian leaky pipe crisis.

Earlier this year former chief executive Ross Taylor and board chairperson, Bruce Hassall announced they would step down after the company reported a $120m first half loss after tax.