Fletcher downgrade 'spooked' market

A Fletcher Construction crane, sits above Auckland University. Photo / File

Fletcher Building's shock downgrade has spooked the sharemarket, shocked big investors and wiped hundreds of millions of dollars off the company's market valuation.

Rickey Ward, JBWere New Zealand equity manager, said the size of the downgrade would "spook" a lot of people "and it certainly surprised us because it comes after earlier downgrades which the market was told were full and final".

Fletcher Building said operating earnings in the year ended June 30 were expected to be about $525 million, down from $682m in 2016 and below the $610m-650m range the company gave in March, when its slashed earlier guidance by about 15 per cent.

It also announced that chief executive Mark Adamson is leaving the company immedidately.

The company's share price was trading down 5.3 per cent this afternoon, wiping nearly $300 million off its market valuation. Shares closed at $7.59.

Ward said yesterday's announcement of a $220m writedown of plumbing business Tradelink and pipe company Iplex was also a surprise.

Fletcher said management had revised its expectations of the business units' "sustainable mid-cycle earnings" and the time required "to make necessary earnings improvement".

"Management still believes both these businesses have the potential for long-term earnings growth," Fletcher said of the two businesses.

Ward said: "To [chief executive] Mark Adamson's credit, he's inherited a lot of things and tried to tidy them up. But he said previously the writedowns were full and final."

The NZX inquiry announced an inquiry into yesterday's disclosures, "given Fletcher's continuous disclosure obligations under the listing rules".

Mark Lister, head of private wealth research at Craigs Investment Partners, said the Fletcher situation was "pretty ugly all round" due to the second downgrade to earnings of about 17 per cent "and if you compare this new guidance to what they were saying before the March downgrade, it's a cut of close to 30 per cent."

Lister said the major problems still centred around two big projects.

Fletcher has not named the projects but previous speculation had focused on Christchurch's Justice and Emergency precinct, almost finished, and SkyCity Entertainment Group's $700m NZ International Convention Centre, due to be finished in 2019.

SkyCity yesterday told the NZX the Convention Centre would not now be finished until mid-2019 after receiving an updated construction programme from Fletcher Building.

But Lister said the issues seemed broader, with a number of smaller projects also giving problems, "so it looks like that whole building and interiors division is in disarray".

"I guess the good news is that all other business units are trading in line with expectations and don't seem to have suffered during the last six months," he said.

"Still, the average person would probably be scratching their head looking at this, especially given the macro backdrop of the last few years, and you can't really blame them."

The market response had been a little worse than expected, Lister said.

"There has been a lot of nervousness around the company and I think most people were giving the stock a wide berth until the August result just in case there was more bad news to come. I guess that's why the share price isn't down further."

The share price is well down from the highs of more than $11 in November. However, in February last year the share price was as low as $6.60, Lister said.

"While there may be a value opportunity emerging as the market becomes even more pessimistic on Fletcher, I think many people will remain cautious until the result. That will give more detail, and we might see some guidance as to how they're expecting 2018 to look in terms of earnings for what it's worth, given their recent track record with guidance," Lister said.

Fletcher had been a long-term underperformer, lagging the broader New Zealand sharemarket over just about any timeframe, he said.

"Let's hope the new CEO can get things back on track," Lister said.

Shane Solly of Harbour Asset Management said Fletcher's announcement yesterday was disappointing.

"Tradelink and Iplex have been problem children for some time and will require ongoing re-working. The additional write down in construction shows how difficult this industry is - in a strong period of demand, costs are hard to control, making profit hard to generate," Solly said.

Adamson's departure might give the company an opportunity to reset and move in a different direction, he said.

Offshore investors would have been surprised by yesterday's events, particularly in Australia, Solly said.

"As Albert Einstein said, 'We cannot solve our problems with the same thinking we used when we created them'," Solly said.

Tama Willis of Devon Funds described the situation as a very disappointing outcome from Fletcher.

"The business needs to be simplified and in our view, the board needs to conduct a strategic review to realise full value for shareholders," Willis said.

"All options including a break-up of the company should be on the table."