Fletcher Building (FBU) shares took a hammering yesterday after the company owned up to a massive, 20% to 25% cut in its expected 2016-17 profit, and the explanation left investors wondering about the competence of the management.
The slide will raise questions abut the company’s final and full year dividends.
An interim dividend of 20.0 cents share will be paid on 12 April 2017. That was up 5% on a year ago (and why the increase if there was such a big profit drop lurking?).
The full year for 2015-16 was 39 NZ cents with a 20c NZ final, which now has to be in doubt.
Fletcher last July adopted a new dividend policy in which it said:
"Fletcher Building seeks to maintain dividends through economic cycles and to progressively grow the dividend over the medium term. The target dividend pay-out ratio, in the range of 50% to 75% of net earnings, is intended to provide sufficient flexibility for dividends to be maintained despite variations in economic conditions. Maintenance of a dividend in this range will be subject to there being no material adverse change in circumstances or outlook.”
That will leave the directors with a difficult call. Operating earnings are now forecast to be down $NZ150 million – or more than 20%, so do directors trim the final to conserve cash, or maintain payout to keep shareholders happy and interested in remaining with the company?
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.
The shares fell by 12% on the NSX and more than 11% on the ASX at one stage yesterday in the wake of the downgrade and confirmation of big losses on several major construction division contracts. The finally ended down 10.2% in NZ and 9.9% in Australia at $7.51.
Analysts think the main question unanswered is how the loss developed within a month of the company reporting a 2% rise in interim profit – even though management mentioned a problems with one contract but wouldn’t talk about it. Earnings in the construction division fell sharply in the half, even though there was a positive boost for revenue and earnings from the full inclusion of the Higgs company in the division’s result
The company told both exchanges it now sees its earnings up to $NZ150 million less than what it forecast a month ago.
Fletcher told the market that it now expected its earnings before interest, tax and significant items would be between $NZ610 million and $NZ650 million for the year to June 30.
This was down from its previous guidance at February’s half year results release of between $NZ720 million and $NZ760 million for the 2017 year: a cut of up to $NZ150 million at this stage.
The revised guidance figure was because of additional estimated losses and downside risk in the company’s buildings and interiors (B+I) business unit in te construction division.
Fletcher Building chief executive Mark Adamson said it was “extremely regrettable" the expected profitability had worsened since comments the company had made last month.
“A thorough review of the B+I business and projects began in late calendar year 2016 and led to new management and governance processes,” Mr Adamson told the exchanges.
"A significant loss was recorded for B+I in the half-year results based on the best estimate available at the time. However, management has now identified an increase in the estimated loss on the major construction project which was referenced at the time of the announcement of the H1 17 results, and the identification of downside risk on other B+I projects, with the majority being a provision for expected losses on one other major project.
It would not name to two projects due to client confidentiality, but one would be completed shortly, and the other in 2019.
"All other business units within the Construction division have continued their strong trading performance. However, taking into account the new estimates of profitability for the commercial construction projects, it is now expected that the Construction division as a whole will report a loss at the EBIT level for FY2017,” he said.
The company said trading for its other divisions was still in line with previous expectations.
On a conference call with analysts yesterday, Mr Adamson said the problem contracts were two of its three largest projects in its building and interiors (B&I) unit. The B&I division controls up $NZ1.5 billion of Fletcher’s $NZ2.7 billion order book, and the bulk of those jobs are in Auckland.
They include the Sky City convention centre, and Adamson indicated that one of the loss-making projects had initial engineering challenges and a major late change to the design brief.
