Fletcher Building shares plunge after problems with two major projects

Ivan Schwartz
March 21, 2017

The full year for 215-16 was 39 NZ cents with a 20c NZ final, which now has to be in doubt. "Maintenance of a dividend in this range will be subject to there being no material adverse change in circumstances or outlook".

That's probably an argument to come for the Fletcher boardroom in June through August, but another cut in guidance if more problems in these problem contracts are found, and the dividend policy won't be the only issue for discussion by the board, or big shareholders.

Capacity constraints in Auckland's construction sector have been driving up building costs by more than four times the rate of inflation in recent years, eroding margins for companies locked into fixed-price contracts. The closed dow 10.2% in NZ and 9.9% in Australia at $7.51. "We've seen massive construction price escalation".

The company now expects operating EBIT (earnings before interest, tax and significant items) to be between $NZ610 million ($AU555 million) and $NZ650 million ($AU592 million) for the full year, down from previous guidance of $NZ720 million ($AU656 million) to $NZ760 million ($AU692 million).

Fletcher Building said the losses were in its buildings and interiors unit of the construction division.

Fletcher has completed a "thorough review" of its construction division which started in late 2016 and found the major contract was likely to face bigger losses, which represents about half of the downgrade, while another major project has attracted provisions for losses due to significantly higher costs needed to complete it, and a number of smaller jobs also faced lower earnings.

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Fletcher flagged losses at one unnamed major construction project at its half-year results announcement in February, when it reported flat profit growth.

Fletcher Building shares tumbled 12 percent after the company cut its full-year earnings guidance by about $110 million because of complexity and delays with a major development that showed up during a review of its construction ...

But it would not name the projects because of customer confidentiality.

"In any event, the second downgrade in short order raises clear questions around the ability of the chief executive to remain in the role", Midgley said.

It now has a construction backlog of about $2.7 billion of which about $1.5 billion is in the B&I business.

'All other business units within the Construction division have continued their strong trading performance.

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