Fletcher price slide sparks fears of index and investor exit

The sky is grey and the birds are circling over Fletcher Construction. Photo/Peter Meecham

Fletcher Building is trading at its lowest price in nearly a decade, sparking fears it could soon drop out of a key sharemarket index, which may well see big-time investors dump the stock.

The company's share price closed at $5.85 on Friday, compared with a two-year high of $11.02 in September 2016.

David Price, a broker at Forsyth Barr, said on Thursday that it was trading at its lowest price since March 2009. There were concerns about the potential for the stock to fall out of the MSCI New Zealand Index at its next rebalancing, to be replaced by A2 Milk Co, which is trading at nearly $13.

The index, launched in 1987, is designed to measure the performance of the large and mid-cap segments of the New Zealand market. Seven companies are in it, covering about 85 per cent of the free float-adjusted market capitalisation in New Zealand.

Fisher & Paykel Healthcare, Spark New Zealand, Auckland International Airport, Ryman Healthcare, Fletcher, Meridian Energy and Mercury Energy are in the index, giving a sector weight of around 34 per cent in healthcare, 18 per cent in telecommunications, 17 per cent in utilities, 17 per cent in industrials and 12 per cent in materials.

Competition is another issue investors are citing. One fund manager said on Tuesday that rivals were making headway in some of Fletcher's main market segments.

"Fortress FBU is under attack in cement and wallboards - its key cash cows. It's more of an evolving story," he said of rivals taking market share in the lucrative building product areas.

Asked for comment on the price slide and possibility of the index exit, a Fletcher spokesperson said: "We are focused on the remainder of the 2018 financial year and finalising a new strategy to present to the market in June."

The price slide comes after Fletcher's announcement in February of losses of nearly $1 billion from its Building + Interiors division, with $292 million of losses for the June 30, 2017 year, and a further $660m expected loss for the June 30, 2018 year.

Shane Solly, a director of Harbour Asset Management, said the share price was being influenced by the index exit speculation and the United States private noteholder extension of waivers until May 31, which still needed to be resolved.

Sir Ralph Norris at a media briefing in February. Photo/Greg Bowker

Fletcher is one of a few New Zealand companies in the MSCI World Index. The constituents of that index are reviewed in May and November annually and the index typically contains all the largest stocks listed globally.

A calculation is made by MSCI on the inclusion of new stocks into the index and removal of others, based on the market capitalisation of stocks but other considerations too.

Experts said the market consensus view was that because of the sharp increase in A2 Milk's price in the last six months, that company will likely enter the index at the May review, and therefore the smallest of the current New Zealand companies in the index would drop out.

The two companies the market thinks would go are Mercury and Fletcher. But because the calculation for determining the index constituents is so complex, it is not yet certain that Fletcher would be removed, even though its market cap has fallen in recent weeks compared with Mercury's.

A number of trading dates at the end of this month will be when the pricing for the index is taken. The announcement on index changes is scheduled for May 15.

If Fletcher left the index, passive investors who use it to benchmark investments might sell their shares, resulting in further price reductions as those institutions dump the stock.

Matt Henry, an Auckland-based Forsyth Barr analyst, wrote a report a few weeks ago saying: "In our view, FBU remains fundamentally expensive against a market backdrop where stocks trading at or below intrinsic value are a rarity, with its multiple discount vs. peers appropriately reflecting factors such as peak cycle earnings, unsustainable land gains, and FBU's high gearing."

His report forecast a net loss after tax for the June 30, 2018 year of $49.1m, a huge reversal of the $321m net profit after tax Fletcher made in the year to June 20, 2017, returning to a net profit after tax of $408.6m in the 2019 year, then $371.8m in the 2020 financial year.

Fletcher, which listed as the current business in March 2001, had a market capitalisation on Friday of $4.08 billion.

It is building the $700m NZ International Convention Centre for SkyCity Entertainment and Precinct Properties' 39-level Commercial Bay office tower and shopping centre on Auckland's waterfront.

A few weeks ago, the business was said to have pulled out of tendering for the multi-billion Auckland City Rail Link tunnelling stage, putting that project back by a few months. However, a spokesperson said: "It is not for us to comment on the CRL 3 procurement process".

Mark Lister, head of private wealth research at Craigs Investment Partners, tweeted that Fletcher had traded as low as $5.74 last week "the lowest since mid-2012. That's 48 per cent below the 2006 high of more than $11".

Craig's sales focus on Friday morning said: "The share price chart illustrates that you need to go back a decade to find a similar low for the stock – that was in the depths of GFC when it touched $5.15 in March 2009, around the time it raised circa $500m of new equity.

"The shares continue to be impacted by passive flows as the stock exits various dividend-related exchange-traded funds.

"Also of relevance is MSCI inclusion – expectations are for FBU to exit the MSCI mid-cap. However this will not be known for certain until the announcement date (15 May), effective date would be 31 May."