Australian downturn helps drag Fletcher down

A pre-cast concrete panel goes up in front of Christchurch's justice precinct, one of 16 jobs which tipped Fletcher into reporting massive losses. Photo: Stephen Jaquiery
A pre-cast concrete panel goes up in front of Christchurch's justice precinct, one of 16 jobs which tipped Fletcher into reporting massive losses. Photo: Stephen Jaquiery
Fletcher Building has downgraded its full-year earnings before interest and tax (ebit) by 10%, or about $20million, according to analysts.

Fletcher shares plunged 7.4%, or 41c, to $5.14 following the announcement.

The downgrade is not linked to the poor performance of its Building + Interiors (B+I) division, whose $660million loss-provision for the current financial year remains unchanged, but to ''challenging'' Australian trading conditions and the timing of house sales in its Residential Division in New Zealand.

Analysts have labelled the Australian ''turnaround'' as having ''stalled'', with potentially more pain to come.

At its annual shareholders meeting in Auckland yesterday, Fletcher said subject to cashflows and trading conditions, it would resume dividends payments in full-year 2019.

During the past two financial years, Fletcher has had to book a total $952million in losses associated with its B+I division, after being caught out badly on 16 mainly fixed-price contracts, including the Auckland international conference centre and the justice precinct project down in Christchurch.

Ebit for the year was expected to be $684million, but that was downgraded to a range of $630million to $680million.

Craigs Investment Partners broker Peter McIntyre said aside from softening Australian trading conditions and house sales, there was also the impact of a four-week mill shutdown at Golden Bay Cement to be accounted for, costing in a range of $8million to $11million.

''The normalised guidance downgrade is around $20million,'' he said.

''The 10% lower ebit was a reflection of Australian trading conditions, the Golden Bay Cement issue and timing of sales in its New Zealand residential business,'' he said.

Mr McIntyre said most of the ebit downgrade was attributable to the tougher Australian environment.

He noted Fletcher's expected ''turnaround'', with Australia as a ''preferred growth platform'', had stalled for now.

Forsyth Barr broker Damian Foster said the Australian downturn was only the beginning, and ''more pain was likely to come''.

He said while the weakness of Fletcher's Australian businesses in the face of softening demand did not surprise, the timing did.

In a research note earlier this month, Mr Foster said it was highlighted Fletcher's Australian division comprised high-operating leverage businesses which were very sensitive to changes in price, demand or cost.

''It is, however, very early in the Australian downturn, and Fletcher's Australian portfolio includes a number of fixture and fittings businesses with later [building] cycle products,'' he said.

It was difficult to see how these businesses would not continue to be materially impacted as the downturn advanced in Australia, he said.

The New Zealand and Australian residential markets are about 43% of Fletcher's total revenue.

In his address to shareholders, chief executive Ross Taylor said in New Zealand, residential consents ran at about 30,000 a year, slightly down on previous years but otherwise as expected.

''Activity levels remain robust, especially here in Auckland, but we think this is now plateauing and there are signs that the Auckland market will pull back slightly,'' he said.

Given continuing supply/demand imbalances, a solid New Zealand economy, and immigration levels not being overly curtailed, Mr Taylor said present activity levels in New Zealand were ''sustainable - at least for the medium term''.

In Fletcher's other New Zealand markets, infrastructure and commercial construction activity remained ''solid'', he said.

In Australia, residential activity accounted for about 40% of Fletcher's market exposure.

''Here we have seen a sharp contraction in new residential consents in the most recent quarter,'' Mr Taylor said.

Hardest hit was the apartment or multi-family portion of the market.

This was impacting Fletcher's Australian businesses and ''feels like a medium term trend that has some distance to run yet''.

He said Fletcher's turnaround plans for the Australian business were now factoring in a weaker Australian residential market than previously assumed.


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