Fletcher: Writing was on the wall

5:04 pm on 14 February 2018

Analysis: The profitability, economic value and reputation of New Zealand's biggest construction company have been gunned down today, writes Gyles Beckford.

Construction site for the SkyCity Convention Centre

Photo: RNZ / Claire Eastham-Farrelly

Today has turned out to be Fletcher Building's St Valentine's Day massacre.

It's the day the company's profitability, economic value, reputation and integrity as a public investment were gunned down.

Its shares today closed down 72 cents - or 9.2 percent - at $7.05.

The writing has been on the wall for some time as it drip-fed the bad news of cost overruns, writedown in asset values and restructuring costs as it battled the vagaries of the global construction and building products markets.

It's had to contend with cheap competition from the likes of China, the slowdown in housing markets around the world following the global financial crisis and the fluctuations in currencies on its multinational business.

But it often crowed about the benefits of its multi-billion dollar pipeline of big construction projects here and abroad, which were the backstop and defence against fickle markets and demand.

It is now clear that Fletcher Building chased almost any and every big job going. It was lead contractor in the Christchurch earthquake rebuild, the International Convention Centre in Auckland, airport developments in the three major cities, a new prison and a new apartment and commercial development on Auckland's waterfront.

But by its own admission the company has botched the basics of pricing, scheduling, and supply.

Sir Ralph Norris, the Fletcher chairman, has spoken of quantity surveyor estimates, which were as much as 100 percent wrong, rising building costs and the flow of communication from management to the board as some of the reasons for losses.

Those losses have hit $952 million in two years - $292 million in 2016 and $660 million in the current year.

Fletcher's stock has now fallen 35 percent in the past year, wiping roughly $2.5 billion off its value.

Friendly banks see Fletcher as a good risk

One of the most serious aspects of the current saga is Fletcher Building's breaching of its banking covenants.

These are the conditions that lenders attach to their loans. In Fletcher's case its lenders have stipulated the company must keep its operating earnings at certain ratios to its debt and as the earnings fall the covenants have been breached - four of them.

The group's debt levels are expected to peak at around $2.4 billion this year and it has total debt facilities of $3.1bn it can call on, but it's currently talking to the banks on new lending conditions. For the time being they are supportive and giving the company the benefit of the doubt.

The saving grace for Fletcher Building is that the rest of the business - which includes well-known names such as roading company Higgins, hardware chain Placemakers and laminates business Formica - are performing well. The earnings from these operations are expected to deliver operating earnings between $680m to $720m.

That cash flow and the scale of the bad news that has been disclosed will have persuaded the lenders that Fletcher Building remains a good risk, albeit with likely more stringent conditions and supervision than before.

The losers

In a headline sense, Sir Ralph has fallen on his sword and said he will step down. Some said he should have gone last year when then-chief executive Mark Adamson was abruptly shown the door in July, when the company had its second profit warning in a few months.

But long-suffering shareholders are losers because they will forego a part-dividend this year and may miss out on the full-year payment. And shareholders have also had the value of their investments savaged by the slump in the share price - it's fallen by a third in a year.

New chief executive Ross Taylor has said this should be as bad as it gets, but the suspicions and fears of more skeletons will linger.

And it may be that New Zealand's ability to get big projects done will get that little bit harder.

Mr Taylor has said Fletcher Building will not be chasing any more big project work other than being a participant or partner.

Thirty years ago the Fletcher Challenge conglomerate stood as a corporate colossus over much of New Zealand's economy - with vast forests, timber and paper mills, steel works, quarries, natural gas and synthetic petrol, house, and office and road building.

There was barely a sector it did not touch.

Today it's a severely wounded corporate set to remain in intensive care for a while to come.

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