Jenny Ruth: Fletcher has $1b maturing and shareholders will want a slice

Many long-suffering Fletcher Building investors are hoping the company decides to return capital to shareholders, notwithstanding lukewarm signals from the company. There's no question Fletcher will have cash to distribute if it wants to.

"Despite management's tepid position on capital management earlier this year, we still believe material shareholder returns are possible," says Forsyth Barr analyst Matt Henry.
He estimates that post the Formica sale, Fletcher will have about $1.7 billion of cash and only $550-850 million of debt maturing in the following 24 months.

Fletcher's net debt to earnings before interest, tax, depreciation and amortisation will be down to about 0.5 times, well below its 1.5-2.5 times target.

"Fletcher has substantial available subscribed capital and can tax-effectively return capital through an on-market buyback or an off-market repurchase," Henry says in a recent note.

Arie Dekker at Jarden (fohrmerly FNZC) says a small capital distribution is possible. But "we reiterate our expectation that the board will take a conservative approach with a focus on the capital programme, potential M&A ambitions, the cyclicality of earnings, remaining Building + Interiors risks and potential to re-gear through a sustainable progressive dividend."

The B+I unit of the construction division, which builds high-rise projects such as Commercial Bay and SkyCity convention centre, lost nearly $1b in the 18 months ended June last year, a figure that includes provisions on the yet-to-be-completed projects.

Fletcher reiterated in late May that it expects B+I provisions won't need to be increased, or as analysts have put it, chief executive Ross Taylor has "kitchen sinked" it. But it remains a risk.

"The risk will not be extinguished until the projects are complete," Henry says. "Anecdotes of staff losses and project issues persist."

The latest news on that front was of further delays to the Commercial Bay project.
Sam Trethewey at Milford Asset Management says there's a question of whether to trust the new management team with investing wisely – Taylor joined the company in November 2017, well after the B+I losses were baked in.

"In the short term, the market would welcome a capital return – they certainly haven't made smart acquisitions in the past," Trethewey says. But since Taylor hasn't bought anything yet, it's hard to judge him on that point, he says.

But Taylor did try to buy Steel & Tube, an acquisition which would have inevitably been held up by Commerce Commission deliberations, even if the regulator did ultimately approve the move, something marked by considerable doubt.

And Taylor had failed to lock up institutional support, with the bid stymied by rival Bluescope swooping in and snapping up Milford's 15.8 per cent stake.

Matt Goodson at Salt Funds Management is cheered by the Formica sale and the fact it was executed much faster than the company's original 18-month timetable.

The sale, which will net Fletcher about $1.19b, was flagged in April 2018 and the price and buyer, Broadview, was announced in December.

But, given Fletcher's history, "there's a relatively high hurdle for acquisitions," Goodson says.

Shane Solly at Harbour Asset Management is relatively cool on the idea of a capital return. "The company's still got to rebuild its underlying business. There's plenty of work to be done for them to get their business back on an even keel – to be thinking about giving capital back to investors is a little bit early."

Which leads to another separate but related question: what will happen to Fletcher's Australian operations?

A key part of Taylor's turnaround strategy is to improve the performance of the Australian operations to match the returns Fletcher achieves in New Zealand.

Dekker notes that Fletcher has invested about $840m in Australia since 2008 for little return and the turnaround strategy requires further capital investment into operations that earn significantly less than Fletcher's cost of capital.

Saying that Fletcher has "a credibility issue with Australia", Dekker wants to hear a more convincing case at the upcoming investor day on June 26.

He outlines the eerie similarity between what Taylor is saying now and what his predecessor Mark Adamson was saying in 2012 and 2013. Dekker wants to know in detail "why it is going to be different this time".

The disclosure so far "provides limited specifics with which to measure progress toward Fletcher's full-year 2023 aspirations in a business where the strategy has been heard before, delivery has been poor and there are question marks over why more capital should be applied."

Indications so far aren't encouraging. Earlier this month, Fletcher lowered the top end of its earnings guidance for the current year, "to reflect year-to-date trading" Fletcher's Australian ebit fell 38 per cent to $33m in the six months ended December, despite sales rising marginally to $1.56b. And that was despite capital spending of $33m.