Fletcher faces big loss

Factory closures and shrinking capacity have contributed to the company's hammering. Photo / Supplied

On Wednesday Fletcher Building chief executive Jonathan Ling will announce the company's first annual loss since 2001.

Analysts say Fletcher's loss will be in the range of $24 million to $71 million after it takes an enormous hit to the bottom line by writing down more than $350 million on costs associated with laying off staff and its ill-fated purchase of Formica.

But the country's second-largest listed company, with a market capitalisation of $4.4 billion, is also expected to emphasise operating profit, which it has predicted to be in the $280 million to $301 million range.

That result will still be well short of last year's net profit of $471 million and the record $484 million it made in 2007.

Fletcher also made a loss in its first year after listing in 2001 but has since gone on to become hugely profitable, a dominant corporate and one of the country's best performers.

So how can it be that a company which once came close to making $500 million two years ago could slip to the invidious position of recording a loss?

The answer lies partly with its disastrous $1 billion investment in United States manufacturing and distribution business Formica and the hugh write-downs it must now make on that investment.

Combine that with a series of factory closures here and in Australia, big staff layoffs and redundancy costs and shrinking capacity and the bottom line is taking a hammering.

Fletcher will move out of the black and into the red because of a series of write-offs likely to include:

A potential impairment of certain assets of up to $150 million which it says are required at balance date.

The write-off of a United States tax benefit of $50 million, a move the market says relates to Fletcher's investment in Formica.

Capacity reductions and redundancies forced by the recession, particularly at factories in Auckland and Perth.

Rob Mercer of Forsyth Barr in Wellington said Fletcher had already flagged the net after-tax loss when it updated profit guidance on April 1.

But he acknowledged that it "might not be commonly realised" that Fletcher was poised to announce the loss. He stressed that analysts had read the forecasts carefully, done the maths and arrived at the conclusion some time ago.

He said people should focus more on what the company earned because that was its true measure. Mercer is picking the loss to come in at $65 million.

Fletcher yesterday closed at $7.32, well up on its 12-month low of $5.13.

Kar Yue Yeo, the new Fletcher analyst at Credit Suisse who has taken over from Andrew Mortimer, also encouraged people to focus on operating profit rather than the bottom line loss. The loss was not really reflective of the true state of Fletcher's accounts, Yeo said.

Mercer and Yeo said net after-tax loss mattered far less because it was only being recorded because of unusual items on the balance sheet.

Yeo predicted a $59 million net after-tax loss caused by $368 million of "abnormals" as a result of write-downs in asset values and restructuring costs.

Much of this could come from Formica, although Yeo said Formica US was beginning to deliver positive ebit although its Spanish operation remained a work in progress.

At the start of this year, Fletcher said its annual result would be at the lower end of analysts' picks.

"Fletcher Building's guidance was for net earnings before unusual items to be towards the lower end of the analysts' consensus range at that time of $289 million to $336 million. This analysts' consensus range has subsequently narrowed to $280 million to $301 million.

"Although operating conditions have softened further since the date of the half-year result announcement, Fletcher Building's guidance is unchanged from the commentary provided at that time," the company told the NZX on April 1.

This year's result will be a loss but Fletcher's fortunes are picked to improve after that and have a $300 million turnaround.

Credit Suisse's Yeo is predicting $304 million net after-tax profit next year and back to the glory days with $427 million in 2011. Fletcher's "adjusted" earnings for 2009 will be $308 million, he predicts, $304 million in 2010 and $427 million in 2011.

"Reported headline for the full year to 2009 is expected to be a loss of $59 million," Yeo wrote in his earnings outlook.

He upgraded the Fletcher recommendation from underperform to neutral with a revised $8 share price.

Matt Henry of Goldman Sachs JBWere is maintaining a "buy" recommendation on Fletcher, has a 12-month target price of $7.90 but has highlighted Formica as one of Fletcher's biggest worries.

"The US market is showing signs of stabilisation, however the substantial inventory levels mean any recovery is likely to be slow and prolonged," he says.

"A key foundation of our positive recommendation on Fletcher is our expectation that New Zealand and Australian residential construction activity positively revert over the next 24 months."

The analysts can project the numbers based on the best information they have, but only on Wednesday will the market really know the true state of Fletcher's accounts.

FLETCHER BUILDING
Employs 17,000 people
* 8220 in New Zealand
* 4150 in Australia
* 1100 in North America
* 1250 in Europe
* 1120 in Asia
* 1180 in the Pacific

Divisions are:
* Building products
* Distribution
* Infrastructure
* Laminates & panels
* Steel