Fletcher Building Ltd’s positive annual meeting presentation yesterday was overshadowed by a cut in profit guidance, taking the share price down 11.2% from $5.55 at the close on Monday to end Tuesday at $4.93.
Over 12 months the share price has fallen 25%. The price is now less than half the level of 2 years ago, when it was just off its peak at $10.64. That’s a shrinking of about $4.8 billion in market capitalisation to yesterday’s closing $4.2 billion.
It also closes the windfall margin shareholders had when they bought into Fletcher’s $750 million capital-raising in April-May at $4.80/share.
The company released its guidance through the NZX at 8.30am, so the share price was already tumbling as shareholders filed into the Eden Park South Stand for the meeting 2 hours later.
10% earnings drop forecast
Chief executive Ross Taylor said that, based on trading to date, half-year ebit (earnings before interest & tax) to 31 December, before accounting for significant items, would be down 10%. The year-ago figure also excluded the losses that were starting to appear in the company’s building + interiors division.
“This [lower guidance] is due to emerging challenging Australian trading conditions and the timing of house sales in the residential division to date. There is no change to the B+I provisions announced in February 2018,” Mr Taylor said.
Mr Taylor put the full-year guidance through to June 2019 in a range of $630-680 million of ebit excluding significant items, and then poked holes in the forecast, expressing doubt that it would be anywhere near the top of that range.
“While the company continues to target a result at the top end of this range, it is prudent at this stage in the year to highlight that ebit will be impacted by the outage at the Golden Bay Cement plant, the slowdown in the Australian residential market and the reduction in land development earnings compared to last year,” he said.
The company aims to resume dividend payments, but Mr Taylor didn’t say whether that intention was for the first half or second half. In any case, it would depend on “satisfactory trading conditions & group cashflows”.
He’ll give an update on that when the half-year results are released in February.
Mr Taylor said the company hadn’t changed its policy of paying dividends in the range of 50-75% of net earnings before significant items, with consideration of available cashflow in the same period.
Another grand vision laid out
All that information made the opening gambit in new chair Bruce Hassall’s presentation to the opening meeting rather presumptuous. Fletcher Building’s vision, he said, was “to be the undisputed leader in New Zealand & Australian building solutions, with products & distribution at our core”.
Fletcher Building, and Fletcher Challenge before it, has a history of over-extending then pulling back. That took it into forestry businesses in North America, construction in Hawaii and the acquisition of UK Paper, and more recently into acquiring major businesses such as Roof Tile Group, sold 3 weeks ago, and Formica, now on the block.
A month ago Fletcher Building saw an opportunity to take over also-troubled-but-regathering Steel & Tube Holdings Ltd, but was rebuffed and withdrew.
“We have the skills & experience to govern now”
Despite the group’s turmoil, Mr Hassall & Mr Taylor presented an upward path. Following the appointment of former Kiwi Rail chief executive Peter Reidy as Fletcher’s construction chief executive, plus the appointment of 5 new directors in September, Mr Hassall told the annual meeting: “We feel that we have the skills & experience we require to govern this company. I am confident that the makeup of the board & the governance refresh, along with executive appointments, will ensure appropriate oversight of the business, and leadership as we focus on building shareholder value.”
My immediate response to that vision to be the undisputed leader in New Zealand & Australian building solutions, with products & distribution at the core, was: Where, in that, is there a place for construction? Further into the presentation, Mr Hassall said residential activity accounted for 44% of the group’s New Zealand revenue – but that’s more as a supplier than as a builder.
The company’s analysis shows consents for new homes peaking at around 32,000/year this quarter, and slipping slightly in the March quarter.
In Australia, the picture is more concerning. Residential activity accounts for 40% of the group’s revenue there, and in the last few weeks there have been dire predictions of sharp decline in residential construction and in housing prices. The federal government is now taking the calls to ease back its heavy immigration programme more seriously.
Despite the apparent market declines in both countries, Mr Taylor said the lower sales volumes by Fletcher Living in New Zealand were the result of longer settlement times & the timing of available stock rather than evidence of a market downturn.
A chart of strategy timeframes showed the remaining 8 major vertical construction projects should be completed in the 2020 financial year, and the building & interiors division returned to profit.
Cashflow up, debt down
On performance in the year just gone, Mr Taylor said the New Zealand businesses lifted revenue 7%, led by building products & distribution, and Australian revenue rose 9%.
The net result of the improved underlying cashflows & the $750 million capital-raising was that net debt was cut by a third to $1.27 billion.
On current market conditions, he said there were signs the Auckland residential market would pull back shortly and, in Australia, a sharp contraction was affecting businesses, particularly laminates & apartment sector.
Fletcher Living house sales were lower than expected, but this was a stock issue rather than a market issue – longer time to settlement, and timing of available stock.
For the 2019 financial year, Mr Taylor said: “We are concentrating on getting the overall business refocused & stabilised. We want to exit the year with good momentum & performance in our core New Zealand businesses, getting all the construction businesses set up to perform, while keeping them within the provisions we made in 2018.
“If we do this well, then in the 2020 financial year we would expect to see signs of performance improvements & market share gains across all our businesses, which will in turn set us up for growth from the 2021 financial year & beyond.”
Mr Taylor said he was attracted to the Fletcher Building chief executive role because he could see a lot of potential for the business, “and having been on the inside now for 12 months, I am even more convinced about this”.
He pointed to a few reasons, which he saw presenting strong opportunities:
- Innovation in the residential sector through off-site manufacturing solutions
- Ecommerce & digitisation processes being implemented across distribution businesses, and
- Product & process innovation across many other areas of business.
Related story today: Fletcher Building top table looks revitalised, but shareholders skip scrutiny
Fletcher Building annual meeting, 20 November 2018, webcast
Annual meeting documents & guidance
Chair’s written address
21 June 2018, Fletcher Building strategy presentation slides