Fletcher Building's Iplex Australia is caught up in pipe failures at 1200 Perth homes. Photo / Natalie Slade
Fletcher Building's Iplex Australia is caught up in pipe failures at 1200 Perth homes. Photo / Natalie Slade
Fletcher Building’s revelations of its Perth leaky water pipe problems left the Auckland investment community pondering what the true cost of damage and repairs might be eventually.
While the company said it had already flagged the issue in a note to half-year accounts, not everyone had either seenthat or realised the significance and some are asking if A$15 million is enough.
The company announced leaks had been found in hot and cold water pipes made by subsidiary Iplex Australia, within around 1200 Western Australia homes built from 2017 to last year and said a A$2m provision had been upped to A$15m.
Grant Swanepoel, Jarden’s equity research director, noted water pipes in Perth homes were installed in ceilings, unlike here where they are in floors, so had the potential to cause far more damage to homes there than here.
The physical and therefore financial cost could be much greater.
He noted the previous A$2m provision and said because that was so low, “we didn’t expect this to be a blowout” but now Fletcher has increased the total provision to A$15m.
Grant Swanepoel of Jardens wonders about the end cost of the Perth leaky pipe situation. Photo / supplied
“Let’s deal with the 1200 homes that need to be fixed. The pipes are all in the ceiling in Perth. That’s how they build there. We put them under the house and in the walls. There’s uncertainty about what the A$15m which Fletcher has provisioned for the issues covers for the 1200 homes in WA.”
Western Australia’s Department of Mines, Industry Regulation and Safety had indicated Fletcher was expected to be found at fault for the manufacturing so it’s how the pipes were made, not the way they were installed, Swanepoel said.
“They’ve put pipes in 15,000 WA homes during the last five years. Only 1200 reported leaks in Western Australia and it’s minimal in other regions. So there’s something about Western Australia that makes these pipes leak. It’s a little opaque on what testing Fletcher can and has done relative to what this department has done.”
But the Fletcher subsidiary indicated their results were different in the statement, saying: “Iplex Australia is undertaking its own ongoing, extensive investigation into the root cause. At this time, the work that has been completed does not identify a manufacturing defect.”
Swanepoel asked: “How do investors think about it this? We have to count on the worst-case scenario that we might have to replace pipes in all 15,000 homes. I would not be giving early guidance on this. We don’t know. Until you have something a bit more firmed up, no one knows. It’s the uncertainty that’s the big question here.”
The A$15m that has been provisioned “appears to be the not-at-risk number”, he said.
Rohan Koreman-Smit, a senior Forsyth Barr analyst, had been through the accounts and seen the contingencies note but because Fletchers had provided for the issue, didn’t think much of it.
“It’s not helpful for Fletcher in terms of converting earnings into cash. There’s also the silicosis issue in Australia and reconstruction cost escalation at NZ International Convention Centre.
“Fletchers are also in discussion with Waka Kotahi with regards to cost overruns on the Puhoi to Warkworth motorway as well. These are all cash costs even if Fletchers excludes them from its measure of underlying earnings. It is a big conglomerate though and issues do seem to pop up regularly,” Koreman-Smit said.
Fletcher’s accounts carried a note which said: “Iplex Australia has received a number of product quality complaints relating to a hot and coldwater polybutylene pipe product it previously manufactured under the name Pro-fit.
“The complaints relate to leaks in homes primarily built by group home builders in Western Australia which have caused repair or replacement of the pipes and in some cases damage to the affected homes.”
No legal proceedings have been started but the complaints to Iplex Australia assert that the cause of the failures is attributable to it, the company said.
Fletcher shares are trading on the NZX around $4.60, down 26 per cent annually, giving a market cap of $3.6b.
