Fletcher changes staff, systems, processes: Analysts

Fletcher might bid for different types of work in future - analysts

Fletcher Building, which on Monday downgraded full-year operating earnings guidance by $110 million, has changed many aspects of its business including staffing, systems, bidding processes and even the type of work it wants to win in future, according to Australian analysts.

In a detailed probe after the downgrade, reasons for it and its effects, three Deutsche Bank Market Research analysts delved into how the company, listed on the New Zealand and Australian stock exchanges, had made many alterations putting in place more stringent processes, changing who deals with it and its top management structures.

"[Fletcher] continues to make changes to its contractor and management processes to ensure improved performance in the future," wrote analysts Emily Smith, Lee Power and Leanne Truong.

They called the downgrade "concerning but overdone" and said it related to two major projects "which we suspect are the Justice Precinct in Canterbury and the SkyCity development in Auckland. While the market remains concerned around future project and cost uncertainty, we believe this risk is currently priced in and maintain our buy recommendation."

Yet they also said management credibility had reduced after the announcement and called the downgrade disappointing because Fletcher appeared to be certain losses outlined at last month's half-year announcement were contained.

Their document forecasting full-year net profit after tax of $387.1 million to $494.9m was issued after Monday morning's conference call where chief executive Mark Adamson and new chief financial officer Bevan McKenzie addressed issues.

"[Fletcher] has also appointed a chief operating officer for the construction division, a new head of risk and governance in the construction division and a new general manager of the building and interiors business unit will start shortly," they said, referring the conference call.

However, the analysts did not mention specific names.

The analysts also told how Fletcher might bid for different types of work in future.

"While [Fletcher] continues to focus on both infrastructure and building and interiors opportunities, management noted on the call that the more stringent processes that are in place around bidding and contract management for building and interiors mean that weighting of projects is expected to shift towards infrastructure projects," they wrote.

Fletcher has won $2.7 billion of work and of that $1.5b is in the building and interiors division but Fletcher has bid for much of that work on a basis which means it could incur losses, due to the types of contracts it has signed.

"We note that of the $1.5b construction backlog in the building and interiors business, two of the three of the major projects under way are fixed price/guaranteed maximum price contracts. The remaining infrastructure ($1.2b) work includes 50-60 per cent alliance/public private partnership work," they wrote.

Construction industry sources said guaranteed maximum price contracts could leave a builder suffering considerable losses because it was restricted in its ability to make price adjustments during the life of the contract. Guaranteed maximum price contracts are often called novated contracts.