Earnings to fall by $100 million

Fletcher Building chief executive Mark Adamson addresses media in February. Photo: NZ Herald.
Fletcher Building chief executive Mark Adamson addresses media in February. Photo: NZ Herald.
Construction giant Fletcher Building dumped a slew of bad news on the market yesterday, including another earnings downgrade and the immediate departure of chief executive Mark Adamson.

Fletcher shares were subsequently mauled on opening, plunging 8.5% to a year low of $7.40, but clawed back some losses to close 50c down for the day at $7.59. Just under a year ago, its shares were $11.02.

There will be intense scrutiny on the Building + Interiors construction division unit, which is responsible for the earnings downgrade, as it has an estimated $1.4billion share of Fletcher’s overall $2.8billion construction work backlog.

It is understood all but one of Building+Interiors major projects is on a fixed price or guaranteed contract.

Fletcher yesterday declined to identify the two major projects, but in recent months analysts have been focusing on Auckland’s Sky City international convention centre and the justice and emergency precinct in Christchurch, worth respectively  $700million and $300million.

Fletcher began the year with earnings guidance of $720million-$760million.

Fletcher yesterday downgraded its expected earnings before interest and tax (ebit) from $610million-$650million, a 12%-19% plunge, to $525million, and signalled a "likely impairment" of $220million on its Iplex Australia and Tradelink business units.

The two unidentified projects, of about 20 contracts within the Building+Interiors portfolio, were are at the heart of the downgrade.

The projects had either cost overruns or extended completion dates.

"Reduced profits" were also expected on a number of smaller projects, Fletcher said.

One project would open later in 2019 than planned, Fletcher said. It is understood to be Auckland’s international conventional centre.

Craigs Investment Partners broker Peter McIntyre said the guidance downgrade of approximately 17% to $525million was "significant".

"This comes on the  back of a big downgrade in March, and relative to the earnings guidance that was in place before that, the new operating earnings forecast is 29% lower," he said.

As in March, the problem division was Building+Interiors, where losses would exceed those previously estimated, largely from the two projects, he said.

Forsyth Barr broker Damian Foster said the March downgrade signalled Building+Interiors’ losses of $110million, and yesterday a further $100million.

The Christchurch justice precinct project accounted for half the latest loss, about $50million, taking its total loss to about $135million. The Sky City convention centre accounted for a quarter of the latest loss, about $25million,  taking its total losses to about $55million.

The remaining $25million related to a number of smaller Building+Interiors projects.

"While we see further risks in the construction book given the environment, the impact on future earnings of any further losses shouldn’t be substantial," Mr Foster said.

Fletcher’s management team suggested any further losses next year would "likely be less than $10million", he said.

During a teleconference call yesterday, Fletcher chairman Sir Ralph Norris and chief financial officer Bevan McKenzie would not give specific details of cost overruns.

They reiterated the other four Fletcher divisions were trading in line with expectations.

While they would not identify the Building+Interiors projects, they said one accounted for 50% of the ebit losses, another one 25% and several other smaller projects the outstanding 25%.

The issues revolved around "slippage of several months" within work programmes, delivery timeframes and some design issues.

When asked whether contracts had been renegotiated, they said original contracts were in place, with a fresh look at programmes and timeframes, "with milestones which can be achieved".

The Building+Interiors contracts backlog would be worked through, and more jobs sought, but there would be "a better group oversight of every bid ... and a more rigorous approach to how we price in risk".

Mr McIntyre noted one building required an increase in resources and costs as it neared completion and the other needed extension to its completion date.

"However, and somewhat concerningly, the issues seem to be broader than this, with Fletcher also noting that reduced profit expectations for a number of smaller projects have also been a factor," he said.

Fletcher said the likely $220million impairment to the Iplex Australia and Tradelink business units should not be taken as a signal the businesses were being readied for sale.

Sir Ralph said the board had yet to determine the effects on dividends this year and next.

Mr McIntyre said the market was expecting a dividend of 40c for the year, 20c of which was paid after the interim result, based on a 75% payout ratio.

"The company may well be able to maintain this dividend," he said.

Mr McIntyre said the impairment would not affect cash earnings. Despite the downgrade, Fletcher remained within its banking covenants. Net debt was 36%, within its target range of 30%-40% and was expected to improve.

Sir Ralph said in a statement earlier the board had believed it was "the right time for Mark [Adamson] to leave the company" but it was too early to say how long it might be before a replacement was found.

Mr Adamson’s share options lapse, he loses his shares in Fletcher’s long-term incentive scheme and will receive no short-term incentive payments for 2017.

The company yesterday appointed its international division chief executive Francisco Irazusta as interim chief executive, starting on Monday.


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