Archive | Securities – NZ

Regulator clears Fletcher Building of continuous disclosure breach

Fletcher Building Ltd’s board became aware in late 2016 of issues affecting performance of the Building & Interiors unit (B+I) of its construction division, but NZX Regulation has found the company didn’t breach its continuous disclosure obligations by announcing a consequent profit downgrade only in March 2017.

The company issued a second downgrade notice in July.

NZX Regulation published its findings yesterday following investigations of Fletcher Building’s disclosure of the material forecast earnings downgrades.

NZX Regulation assessed what information was material to Fletcher Building, and when it came into the possession of Fletcher Building’s senior executives & directors to trigger the disclosure requirement.

The regulator concluded that Fletcher Building released the material information promptly & without delay, as required under the listing rules. You can click on its full investigation report below.

Fletcher Building, not surprisingly, welcomed the findings.

The revelations

On 22 February 2017, Fletcher Building released its half-year financial results, confirming guidance it had previously given to the market, that operating earnings were expected to be in the range of $720-760 million for the 2017 financial year.

The company sought an urgent trading halt on Friday 17 March, saying it was reviewing the financial performance of its Construction division & its impact on earnings guidance previously provided to the market. The following Monday, 20 March, the company announced an earnings guidance update, including details of a downgrade in forecast earnings to a revised range of $610-650 million. Fletcher Building’s share price declined 13%, opening at $9.22, hitting a low of $8.00 during the day and closing at $8.28.

On 20 July, Fletcher Building announced a trading update & the departure of chief executive Mark Adamson. That announcement included details of a further downgrade in forecast earnings, to $525 million. The share price declined 8.8% from an opening price of $8.09 to a low of $7.38 before closing at $7.59.

The earnings forecast downgrades reflected losses being accrued in a number of projects within the B+I unit. NZX Regulation concluded: “We consider that information about those specific losses was not separately material information for Fletcher Building. This recognises the specific facts & circumstances relevant to Fletcher Building and how market expectations of its financial performance were set, which will necessarily differ from issuer to issuer.

“Market expectations of Fletcher Building’s financial performance were set by the published group level earnings forecasts. In these circumstances, we consider that financial performance at a business division level would need to be assessed in relation to how the performance impacted the group earnings forecasts in order for that information to be material information for Fletcher Building.

NZX investigation’s limits

NZX Regulation said its investigation was limited to assessing compliance with the NZX rules, and note:

  • Rumours relating to progress on the status of particular Fletcher Building projects are not the same as rumours about Fletcher Building’s financial performance at a group level
  • Rumours about financial performance measures must have a sufficient degree of credibility, specificity & certainty in order to give rise to potential disclosure obligations, and
  • In any case, in order for Fletcher Building to have a disclosure obligation, the information must be in the possession of Fletcher Building’s executive officers or directors.

The regulator concluded: “We have not identified any evidence that executive officers or directors of Fletcher Building were in possession of material information as a result of the rumours & speculation relating to its progress on particular projects.”

NZX view of how the 2016 events unfolded

NZX Regulation said a number of matters relating to the Construction division were brought to the attention of the Fletcher Building board as a result of a review in late 2016: “That review focused on issues relating to personnel, organisational structure, and management & governance processes within the Construction division.

“Those issues led to a strategic review of the Construction division, including the B+I unit. During the strategic review, the performance of the B+I unit & specific projects within that business unit became an increasing focus for senior Fletcher Building executive officers & the Fletcher Building board. This included an in-depth project-by-project review of the Construction division, and changes to the senior leadership team & senior management functions within the Construction division.

“As a result of this process, Fletcher Building senior executives became aware of information relating to the financial performance of the B+I unit, and the impact of certain major projects on that performance.

“Determining margins on construction projects is complex, requiring subjective assessments & prudent judgments to be made on future events. These assessments need rigorous testing by management to ensure appropriate judgments are made. Due to financial reporting standards that apply to construction projects, any projected losses must be immediately accounted for. Fletcher Building tracked these projects & the estimated impact of projected losses on the group earnings forecast.

“Although losses were being recognised for certain projects in the B+I unit during late 2016 & early 2017, these did not initially have a material impact on the group earnings forecast, which remained within the published guidance range. As the review continued throughout the first quarter of 2017, additional information & estimates relating to the financial performance of the Construction division became available to executive officers….

“Our investigation identified that Fletcher Building acted promptly when information relevant to Fletcher Building’s financial performance & earnings forecasts came into the possession of executive officers & directors. This included Fletcher Building assessing that information in light of Fletcher Building’s continuous disclosure obligations.

“Following our investigation, we determined that, for the purposes of the rules:

“March 2017 downgrade: Fletcher Building first became aware on the evening of 16 March that there was a material risk that its actual group earnings results would materially differ from its published forecast. That awareness arose when information was provided to Fletcher Building executive officers that evening on additional projected losses on a key Construction division project. In order to manage its disclosure obligations, and in accordance with NZX Regulation guidance, Fletcher Building applied for a trading halt while it sought further information to confirm its revised forecast. This included assessing information relating to provisions against future losses. The actual change to Fletcher Building’s earnings forecast was confirmed while the trading halt was in place. Fletcher Building released its announcement on the earnings forecast downgrade before market open on 20 March, at which time the trading halt was lifted, and

“July 2017 downgrade: Fletcher Building first became aware on the evening of 19 July that there was a material risk that its actual group earnings results would materially differ from the revised earnings forecasts that had been published on 20 March. That awareness arose when information was provided to Fletcher Building executive officers as a result of regular project reviews, regarding projected losses in various of those projects. Following engagement with management & Fletcher Building’s auditors, the Fletcher Building board determined that additional loss provisioning would also be required. Fletcher Building released its announcement on this subsequent earnings forecast downgrade before market open on 20 July.”

NZX Regulation investigation report Fletcher Building Ltd – continuous disclosure

Earlier stories:
27 October 2017: Sheppard turns Fletcher meeting into “absolution or exorcism” exercise
25 October 2017: Fletcher issues guidance, names new chief executive
25 October 2017: Fletcher shares in trading halt on eve of AGM
21 September 2017: A year on, Fletcher board still has ‘construction nous vacancy’ pencilled in
17 August 2017: ‘Fessed up, time to move on, says an unconvincing Fletcher boss
21 July 2017: Fletcher Building takes axe again to construction earnings, Adamson ousted
20 March 2017: Fletcher Building cuts earnings guidance by $110 million
19 March 2017: Fletcher Building to explain construction loss Monday morning
22 February 2017: Fletcher Building net up 2% after site closures

Attribution: NZX Regulation report.

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Auckland Airport to plough North Queensland sale return into NZ growth

Auckland International Airport Ltd has put a price of $A370 million on its 24.6% stake in North Queensland Airports Pty Ltd and will offer the lot to the other 3 shareholders of the private company.

Auckland Airport chief executive Adrian Littlewood said today: “The sale will enable Auckland Airport to focus attention on growing its New Zealand travel, trade & tourism businesses and to recycle the proceeds into supporting the significant step up in aeronautical investment at Auckland Airport over the next 5 years, that we recently announced along with our aeronautical charges for financial years 2018-22.”

The sale will be subject only to securing necessary regulatory & counterparty approvals (if any) and completed in accordance with the requirements of the North Queensland Airports securityholders agreement.

Auckland Airport said all 3 other shareholders were entitled to buy pro rate shares of the Auckland interest, but 2 – The Infrastructure Fund (which has 20%) & Perron Investments Pty Ltd (5%) – have said they’re prepared to take the whole Auckland 24.6%.

IIF Cairns Mackay Investment Ltd, an entity advised by JP Morgan Asset Management, owns 50% and hasn’t signalled its interest yet. After a strategic review last August, Auckland Airport also undertook discussions with third parties.

Attribution: Auckland Airport release, North Queensland Airports website.

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Michael Hill lifts sales but US concerns continue

Jewellery retailer Michael Hill International Ltd increased group revenue by 4.7% and same-store sales by 0.5% in the December half-year, but reiterated concern about its US business, where sales fell 10%.

The trading update combines 5 months of accounting-adjusted sales results plus preliminary sales figures for December. The company will deliver its more detailed half-year results on 22 February.

The company opened 14 Michael Hill stores & one Emma & Roe store during the half-year, taking the total to 347 – 317 Michael Hill, 30 Emma & Roe.

7 of the new stores are in Canada, taking the total there to 83, and 6 opened in Australia, taking the total there to 172. The company added one store in New Zealand for a total 53, and has 9 in the US.

Sales under the Michael Hill brand grew 4.3% and same-store sales grew 0.7% – 3.4% in New Zealand, 4.8% in Canada, flat in Australia, down 10% in the US.

Emma & Roe grew sales by 20.1%, but same-store sales fell 5.4%.

Total sales for the group, now based in Brisbane, were $A341.5 million ($A326 million for the December 2016 half) – Michael Hill $A331 million ($A317.3 million), Emma & Roe $10.5 million ($A8.75 million). E-commerce sales grew by 71% to $A5.6 million.

Chief executive Phil Taylor said the company was in the final stages of its comprehensive brand review, a management review of the findings.

Attribution: Company release.

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Warehouse’s “improving trajectory” looks illusory, transformation impacts still to come

The Warehouse Group Ltd said yesterday “encouraging” Christmas trading confirmed its “improving trajectory”.

The first comparison, for the retail group’s main outlets, the Red Sheds, indicated a trajectory that’s negative, but over Christmas was less bad.

The second comparison, for the company’s first half (to the end of January), shows a steep decline in returns – down 22-28%, largely resulting from “a significant accrual for a redesigned incentive programme”.

The word “significant” has no place in a statement like this because it signifies nothing. It commonly amounts to “big effort which should be praised”, but in reality should be read as “Big deal! Tell me when you’ve got something solid to say.” The Warehouse has made no attempt here to quantify the cost of hiring new staff & importing foreign executive expertise.

The company talked a year ago about reorganising, and has since focused on “transformation”.

In yesterday’s announcement, when I got to “strong sell-through of seasonal lines” I knew gobbledegook was going to win over a straightforward tally of performance. The quoted phrase’s context: “Year on Year unit sales show an increase of 5.1% with transactions rising 2.9% in conjunction with strong sell-through of seasonal lines.”

I figure statements like that, which have made it through the chief executive to the board, are indeed a strong indication that transformation is needed, but not quite the one they’re talking about.

The strong sell-through was followed by this comment from group chief executive Nick Grayston: “As expected the move from Hi-Lo to Every Day Low Price (EDLP) in the Warehouse ‘Red Sheds’ coupled with a one-time reduction in ranges and consequent clearance activity has resulted in a reduced Average Selling Price, however margin rates on current products have generally improved, and customers’ reaction to the pricing changes and product improvements have been very positive. Further work is in progress around price elasticity with a view to improving gross margins and the one-off clearance of discontinued products is on track.”

Red Shed Christmas same-store sales were down 2.8%, whereas they were down 4% in the first quarter, the 13 weeks to 29 October.

While Mr Grayston said the Warehouse Stationery ‘Blue Sheds’ were preparing for their peak back-to-school trading season – which is annual – he added: “However, we expect sales to be down about 6.5% at the first half based on softer performance of communications & technology segments, and the one-off impact of the integration of the Blue Sheds’ business onto core Red Sheds operating systems at the start of the financial year.”

Mr Grayston said the technology & appliance retailer Noel Leeming continued to perform strongly and outdoor gear retailer Torpedo7 had been steadily improving all year. Torpedo7 founders Luke Howard-Willis & his father Guy sold a majority stake to The Warehouse in 2013 and exited completely in early 2016.

Moving on from what looks like weak Christmas trading by the Red Sheds, a continuing downturn in the Blue Sheds, no indication of how well Noel Leeming did over Christmas and an indication that The Warehouse hasn’t yet got to grips with a small retail chain it fully acquired in March 2016, Mr Grayston was keen to focus on transformation – but warned not to expect benefits too soon: “While we are all keen to start delivering the benefits of our transformation, we have a long way to go, but these are encouraging signs. H1 trading to date has confirmed for us that our customers like and have responded well to our pricing & product changes. We continue to invest in technology and build out the team to execute the next steps in our change programmes.

“Our forecast for first-half (to the end of January) adjusted net profit from continuing operations for the group is $32-$35 million, which is 22-28% down on the comparative continuing operations performance last year.

“The result for the half includes a significant accrual for a redesigned incentive programme, intended to reward better than expected financial performance along with reinforcing specific behaviours necessary to execute the transformation. It recognises the need to retain staff and recruit top global talent through this rapid period of radical transition. If the second half-year performance fails to deliver on our improved outlook, the accrual will be reversed to profit. If not for the accrual, our financial performance in the first half would be close to last year’s.”

A word from the chair

Warehouse chair Joan Withers added: “Many of the operational impacts on profit performance are transitional in nature and not expected to recur. The Warehouse Group is in the process of a fundamental transformation to improve performance & profitability, which is our key focus for 2018.”

The company will issue its full-year guidance along with the first-half financial results on Thursday 8 March.

Earlier story:
12 January 2017: The Warehouse reorganises

Attribution: Company release.

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Summerset quarterly sales top 200

Retirement village developer & operator Summerset Group Holdings Ltd achieved 200 sales of occupation rights in a quarter for the first time in the 3 months to December.

The 106 new sales matched 4th-quarter sales in 2016, but resales were far above previous quarterly figures in both 2016 & 2017.

The highest previous number of resales over the 2 years was 77 in the June 2016 quarter. In the December 2017 quarter there were 98.

Total sales for the year were up 3.7%, from 658 to 682 – new sales 382 (414 in 2016), resales 300 (244).

Summerset chief executive Julian Cook didn’t comment on the drop in new sales for the year, but said presales & waitlist levels “both continue to track positively.”

2017 sales by quarter & annual totals:
New sales: 97, 82, 97, 106; 382
Resales: 74, 70, 58, 98; 300
Total sales/quarter: 171, 152, 155, 204; 682

2016 sales by quarter & annual totals:
New sales: 75, 108, 125, 106; 414
Resales: 46, 77, 71, 50; 244
Total sales/quarter: 121, 185, 196, 156; 658

Attribution: Company release.

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Augusta gets some remodelling for second industrial fund property

Augusta Capital Ltd confirmed its intention to establish an industrial property fund on 22 December, when it entered into an agreement for the new fund to unconditionally acquire the property at 862 Great South Rd, Penrose.

Augusta managing director Mark Francis said the fund would acquire the Penrose property for $19.05 million, with settlement set for 29 March.

The company settled the $44.9 million acquisition of its first fund asset, the Hub industrial property at Seaview in Wellington, on 20 December.

The 2.37ha Penrose property is fully occupied by Graphic Packaging International NZ Ltd (formerly known as Colorpak NZ Ltd), which will surrender the front portion of the property and enter into a new 8-year lease for the rear portion (from completion of certain works in the second half of 2018).

Graphic Packaging is ultimately owned by NYSE-listed Graphic Packaging Holding Co, which produces packaging for consumer products companies.

Mr Francis said the vendor (a private individual) was obliged under the sale & purchase agreement to complete a demolition of the front portion of the site. Once that’s done, the front portion presents various development options for the new industrial fund. The vendor has also agreed to underwrite $12 million of shares in the new fund (secured by a right to set off against the purchase price payable).

Mr Francis said the acquisition reinforced Augusta’s intention for the fund to be weighted towards the Auckland industrial market. He said Augusta was completing due diligence & negotiations on a further 2 Auckland properties.

Timing of the public offering for the new fund will be announced in the New Year.

Earlier stories:
20 December 2017: Augusta settles Hub purchase
13 December 2017: Augusta buys Wellington property as seed for new industrial fund

Attribution: Company release.

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Augusta to resyndicate & add to Airways premises

Augusta Capital Ltd has entered into a development agreement with Airways Corp of NZ Ltd and the existing Augusta-managed syndicate that owns Airways’ Christchurch premises.

Augusta managing director Mark Francis said on 22 December the agreement provided for the development of a new “importance level 4” building which will house part of Airways’ new air traffic management platform. In return, Airways is committing to:

  • an extended 25-year lease term on the new building & 2 of the existing buildings (effective from practical completion, which is expected to occur in mid-2019); and
  • a 9-year lease term on the remaining building (which begins at a date elected by Airways between 12 & 18 months after practical completion)

Mr Francis said the agreement was conditional on receipt of a resource consent, approved funding terms & the approval of the investors in the existing syndicate which owns the property. These conditions are due to be satisfied by 30 January.

To fund the landlord’s development obligations, Augusta Capital subsidiary Augusta Funds Management Ltd proposes to re-syndicate the property, giving existing investors a preferential right to invest in it.

Mr Francis said Augusta Capital would underwrite $15 million of the $22.75 million of equity proposed to be raised in the resyndication, and a third party would underwrite the balance.

In addition, Augusta Capital has guaranteed the existing syndicate’s obligations, which will be released once the new syndicate is established and the required equity & debt raised.

Augusta expects the new syndicate to be established by 29 March.

Attribution: Company release.

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Goodman sells in Christchurch, signs another addition to Highbrook

The Goodman Property Trust announced 2 transactions yesterday – a new industrial development at Highbrook Business Park in Auckland and the sale of a commercial building at 7 Show Place in Christchurch.

Management company Goodman (NZ) Ltd’s chief executive, John Dakin, said: “We’re executing a development-led growth strategy that’s converting the trust’s landholdings into high quality, income-producing properties. Funded through asset sales, it’s repositioning the portfolio and focusing our investment in the Auckland industrial sector.”

Goodman will develop the new 7300m² industrial facility at Highbrook for Plytech International Ltd, a manufacturer & supplier of plywood-based products, which is doubling its space requirements to facilitate its business growth.

The development has a forecast total cost of $11.4 million (construction, and excluding land allocation) and is expected to be completed in November 2018.

“This new project adds to the $107 million of development work currently underway at Highbrook. The volume of activity reflects the strong demand that exists for prime industrial space in Auckland and the unique attractions of this world-class business park,” Mr Dakin said.

The sale of 7 Show Place for $14.5 million continues the sales programme funding Goodman’s development work book. The 3-level 3037m² office building in the Show Place Office Park in Addington, has been sold to a local syndicator.

The transaction is expected to settle in January.

Mr Dakin said completion of all current developments & contracted sales would result in Goodman’s Auckland industrial weighting increasing to almost 85% of its total portfolio, while strategic landholdings represent less than 5%.

Attribution: Trust release.

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Stride defers NorthWest 2 option expiry at Gunton’s request

Stride Property Ltd said today it had agreed to defer the expiry date of Westgate Town Centre Ltd (Mark Gunton)’s 3-year option to acquire Stride’s NorthWest 2 development.

The option was due to expire on Tuesday, 19 December, but will be extended to a date in the new year which depends on the outcome of Stride’s discussions with Mr Gunton.

Stride developed NorthWest 2 alongside the NorthWest Shopping Centre at Westgate, at what was then the top of Auckland’s North-western Motorway.

Stride chair Tim Storey said the company undertook the development after Westgate Town Centre Ltd granted Stride a conditional right & ground lease for the NorthWest 2 site. Under the agreement, Stride granted Westgate Town Centre Ltd rights allowing it to acquire the development from Stride within 3 years of the ground lease’s effective date (the deadline being Tuesday), at a price equal to 115% of Stride’s total development cost (including holding costs).

In the event that Westgate Town Centre Ltd didn’t acquire the development within the 3-year period, the agreement also permits Stride to obtain freehold title to the land for a nominal $1. In its accounts to 30 September, Stride held the NorthWest 2 development in the consolidated interim financial statements at $36.3 million.

Link: Stride interim report to 30 September 2017 (see accounts page 30, note 11 re NorthWest 2)

Earlier stories:
5 October 2015: Albany settlement helps Stride’s Westgate programme
30 September 2015: Westgate opens for business tomorrow
24 July 2015: DNZ looks to grow investment management as first Westgate project nears completion
11 February 2015: DNZ puts next property on market as NorthWest mall leasing hits 90%

Attribution: Stride release, interim report.

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Augusta settles Hub purchase

Augusta Capital Ltd has settled its $44.9 million acquisition of the Hub industrial property at Seaview in Wellington, which it wants to use as a seed asset for a new open-ended industrial fund.

It covers 4.06ha at 17 & 25 Toop St, 101-103 & 109-117 Port Rd, Seaview, and has a net lettable area of 32,600m² of warehouse & office.

Managing director Mark Francis said today the company would release the timing for the initial public offering of the industrial fund in the New Year.

Mr Francis said last week the company was also investigating & undertaking due diligence on several Auckland industrial properties and expected to launch the industrial fund with a mixture of Auckland & Wellington stock, but with a weighting towards Auckland.

Augusta expects the fund to initially raise between $50-70 million of equity. Augusta will underwrite $35 million of that and is working with a consortium of high-net-worth private investors to underwrite the balance.

It will be Augusta’s first open-ended unlisted multi-asset fund.

Earlier story:
13 December 2017: Augusta buys Wellington property as seed for new industrial fund

Attribution: Company release.

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