Fletcher Building shareholders will suffer a 15 per cent dividend cut after the full-year result showed a $301 million hit, mainly from losses on Auckland’s partly built NZ International Convention Centre - but all major metrics are headed in the wrong direction.
So what does chief executive Ross Taylor say about the SkyCity project cutting dividends to that extent?
Last year’s 40cps total dividend was sliced back to 34cps in the full-year accounts to June 30, 2023. Asked about that payout fall, Taylor said: “We have a dividend policy to pay 50 to 75 per cent of our profit after tax pre-significant items. You also look at underlying cashflows. Paying out 34c is about 60 per cent. That was a bit lower than what the market expected. It’s still a very good payout.”
Asked about the $301m hit to accounts, Taylor said: “Disappointment is the word I’ve used. The lion’s share is $255m and is the convention centre. But the team there are passionate and are doing a great job.”
Asked about all major metrics heading in the wrong direction, Taylor said: “I agree those ones you named are heading in the wrong direction but it’s important to look at what’s going on in the underlying business. What’s caused the issues is completing one project which is an artefact of history. The business excluding that, our profits and margins and return on funds are up.”
Asked if $255m is the total loss expected on the NZICC where Fletcher Construction is the head contractor and where work isn’t forecast to be finished until 2025, Taylor said: “That’s what we believe it will be and what we’re forecasting. But the risk is never retired until the project is finished.”
Asked about NZICC insurance payouts, Taylor said the issue for booking proceeds from insurance payouts was uncertain: “We think we’ve got a good case for those third-party insurance revenues and we intend to execute that case.”
The company was well-positioned for the slightly softer 2024 but $800m was being invested in new opportunities of which the lion’s share was going into New Zealand, Taylor said.
“It’s really a positive thing for a big NZ company making an investment, creating jobs, holding the IP in the country. We’ve got an exciting future in front of us, good for us and good for the country.”
Notes to the accounts showed Cyclone Gabrielle and the North Island floods contributed a further $22m to that $301m hit.
The impact on Higgins was put at $17m, Winstone Aggregates $2m, Fletcher Steel $1m, and PlaceMakers and Mico $1m. Impairment of property, plant and equipment was put at $8m, write down of inventories $3m, other direct remediation works of owned sites $1m and rectification of damages to leased assets $10m.
A $16m provision has also been made for the Perth leaky-pipe issue where houses were fitted with Pro-Fit pipes from Fletcher’s Iplex. Asked for an update on that, Taylor said studies were under way to examine wider factors including water pressure in houses and the chemical properties of the water going in.
Annual 2023 revenue fell from $849m to $846m, Ebit was down 29 per cent and net profit after tax fell 45 per cent.
Net debt for the year for Fletcher Building stands at $1.4b, up on the $842m previously but chief financial officer Bevan McKenzie said it was still at the lower end of the target range.
McKenzie said on the analyst conference call that the dividend reflected a solid result “having regard to the cash flow impact of the construction legacy projects”.
“We continue to think we will pay good sustainable dividends. We would like to move higher.”
Taylor summarised for analysts the disputes or claims Fletcher had on three big projects:
1. Ara Tūhono Pūhoi to Warkworth new motorway where there is a claim of $200m because of Covid delays of which Fletcher’s share is 50 per cent;
2. NZICC where Taylor said Fletcher had third-party liability insurance claims, which are not yet booked as revenue;
3. A dispute with Wellington Airport car park, which has claimed $40m against Fletcher. The construction company disputes that and has made a counterclaim. Taylor hopes it can be settled out of court.
On the outlook, the company said the construction legacy was nearing completion, but referred to “some risk to manage”.
The balance sheet was in good shape to support $800m-plus of committed growth investment, the company said.
In response to the result, Jarden’s Grant Swanepoel and Luan Nguyen released a note with a “buy” rating on the stock at a target $6.40.
Guidance for 2024 was not explicit but colour similar to the strategy day in June, they said.
The company was guiding softer on residential margins as well as some softness in building product margins while holding on to margins across concrete, Australia and, surprisingly, even distribution, the analysts noted.
Fletcher had indicated that the housing market was starting to show some stability and it expected to build 700 to 800 residences next year, the Jarden analysts noted.
The balance sheet remained stable with net debt at $1.4b, around $100m better than forecast as second-half cash flow was stronger than anticipated.
Legacy projects would have a negative $365m impact before tax claw-back on full-year 2024 cash flow, they noted.
“The company plans to spend circa $500m over the next three years, above the circa $200-250m normalised capex per annum, this all crimping ability to pay top of dividend guidance range. The $800m ($308m already spent) growth investment programme for the period FY23-FY26 guided to result in FY27 run-rate EBIT uplift of approximately $120m,” they said.
Perth’s pipe issue remained a problem: “Iplex Australia Pro-fit pipes leaking claim has not gone away and the issue has been referred to the Australian Competition and Consumer Commission. Having already provisioned $15m, the company’s internal work has not highlighted a problem but they do warn that further claims could be possible,” Swanepoel and Nguyen noted.
Analysts asked about a potential 15,000-house exposure from leaky pipes and if a product recall could be forced in Australia: “Regos have the power to recall but they’ve got to actually find a fault with the product. As ACCC get involved, we will work absolutely with them because we all need to get to the bottom of what’s going on,” Taylor said.
Marcus Curley, UBS analyst, said there was limited new information. Underlying ebit for 2023 was in line with guidance but no specific 2024 guidance was given, yet higher debt and lower dividends were noteworthy. He also rates the company as a buy, with $6.55 target price.
Fletcher’s share price dropped from around $5.52 on Tuesday to $5.03 at Wednesday’s close, giving a market cap of $4.33b.
Anne Gibson has been the Herald’s property editor for 23 years, has won many awards, written books and covered property extensively here and overseas.