UPDATE: Norris offers apology as Fletcher Building forecasts 2018 B+I loss of $160M, further provisions
(Updates to add share price in paragraph three and broker comment in paragraphs 7-9)
By Jonathan Underhill
Oct. 25 (BusinessDesk) - Fletcher Building has taken a further $125 million provision against problematic construction contracts including the Convention Centre and the Justice Precinct in Christchurch and said its B&I unit would report a full-year loss of $160 million, including $35 million of overhead costs.
A trading halt was lifted on Fletcher's shares following the announcement which follows a review by KPMG. Losses on the Convention Centre and the Justice Precinct accounted for about two-thirds of the $292 million loss recorded for B&I in 2017.
The shares fell 5.5 percent to $7.52 when trading opened on disappointment over the latest earnings downgrade. The stock has fallen 25 percent this year.
"There is acknowledgment that there is uncertainty with respect to large B+I projects that still have some time to complete," the company said in a statement. "In recognition of this, Fletcher Building intends to provide regular updates to shareholders on the performance of the B+I business and progress on the key projects. Earnings guidance for the remainder of the Group is informed by trading results across all of Fletcher Building’s divisions for the first quarter of FY18, and the current outlook for the remainder of the financial year."
Excluding the B+I loss, full-year earnings guidance for the rest of the group is $680 million to $720 million, suggesting full-year earnings including B+I could be as low as $520 million.
“I want to offer my personal apology to our shareholders," chair Ralph Norris said. "Mistakes have been made and responsibility ultimately rests with the board. As we stated at our full year results briefings, we fully accept this responsibility."
Grant Williamson, a director at Hamilton Hindin Greene, said investors are "quietly losing confidence in the company given that they have had a number of write-downs regarding these projects. I think it will take quite a while for confidence to rebuild in the company."
He noted, however, that the stock is holding near support at $7.50 although the Australian reaction will be key as they are large holders of the stock: "If there's any selling (when Australia opens) it could see further downside."
Williamson said news there is a new chief executive is a positive and may be one of the reasons the stock hasn't fallen further.
The company named Ross Taylor as chief executive, starting Nov. 22. Taylor was most recently CEO of UGL, an international engineering, services, construction and product manufacturing business, and was previously CEO of Tenix, a privately held engineering and construction services company. Norris said Taylor had "proven experience leading business turnarounds and improving performance and shareholder returns, and has direct experience across a range of Fletcher Building’s core sectors – including housing, manufacturing and construction."
At both UGL and Tenex "he returned loss-making businesses to profitability, doubling the UGL share price in two years," Norris said.
Taylor's appointment follows the sacking of former chief Mark Adamson amid cost overruns at major building projects, which Fletcher named for the first time today.
Auckland-based Fletcher downgraded earnings twice last year as escalating construction costs and a lack of oversight on major building projects saw the B+I unit come under pressure. After booking a series of one-time impairment charges Fletcher had said cash flow was set to improve in the 2018 financial year.
The KPMG review covered two B+I projects, the Convention Centre (NZICC) and Commercial Bay, and two infrastructure projects, Puhoi to Warkworth and Hamilton City Edge Expressway, Fletcher said. "In three out of the four projects reviewed, being Commercial Bay and the two projects in the Infrastructure business, KPMG’s forecast outcome is broadly in line with management’s expectations – risks and opportunities exist on each project, however, final margins in all three cases are expected to be positive," it said. "The key issues identified relate to the NZICC project, which has already been identified as a major contributor to the Company’s losses in FY17."
KPMG didn't include the Justice Precinct in the review because that contract is near completion, Fletcher said. It made the statements ahead of its annual meeting in Auckland this morning. The meeting may see criticism heaped on the board. The NZ Shareholders' Association has been critical of the company's performance and communication with investors and plans to address issues including directors' fees at the meeting. The NZSA surveyed its members for their views on Fletcher last month with almost 90 percent of the 250 members who participated wanting changes at board level including 8 percent who wanted the entire board dumped.