Market ponders future for a post-fire Fletcher Building

Fletcher chief executive Ross Taylor at Wednesday's press conference. Photo / Jason Oxenham

As the flames and smoke die down atop the NZ International Convention Centre, the market is yet to hear much more from Fletcher Building, trading 18 per cent down in the last year and now facing further challenges on its SkyCity job.

New Zealand's biggest construction company and building materials manufacturer and distributor is a key stock, one of the seven largest listed businesses here. That makes it a mandatory hold for institutional investors here and overseas, and a big investment for many KiwiSaver funds.

Day two, October 23 at the fire. Photo / Dean Purcell

Shane Solly, of Harbour Asset Management, sees post-fire positives and negatives for the business.

"The last few years of seismic-related rebuilds highlight how challenging it can be to get a clean outcome from insurers. A rebuild will be required so it may be that Fletchers is able to extend its workbook with the rebuild."

Another institutional investor sees the business facing the double impact of the fire and a battle for its place at the top, judged on its recent trading.

Salt Funds managing director Matt Goodson said both factors weighed on Fletcher shares.

"The base assumption is that there is adequate insurance but the market reaction has been complicated by the price in relation to the MSCI index."

The MSCI NZ index, launched in 1987, measures the performance of the large and mid-cap segments, seven businesses covering about 85 per cent of the free float-adjusted market capitalisation in New Zealand. Its members are Fisher & Paykel Healthcare, a2 Milk, Auckland International Airport, Spark NZ, Meridian Energy, Ryman Healthcare and Fletcher Building.

Goodson said Fletcher might fall out of that list when the index is next rebalanced, to be replaced by Contact Energy or Mercury NZ. Inclusion in the index depends on the competing companies' share prices in the later part of this month, and the outcome won't be known until next month.

Even before the fire, Forsyth Barr analysts Matt Henry and Matt Dunn expected Fletcher to disappoint market earnings expectations again in 2020/21. The stock is "discounted compared to sector peers and the broader market masks weak medium-term free cash flow and peak cycle demand", Net profit after tax is predicted to fall from $367 million for the June 30, 2019 financial year to $290m this current year, $291.5m the following year but then to rise to $305.4m by 2022.

In an August 22 note, they called Fletcher a perennial disappointer, particularly citing ongoing construction losses. "Consensus view is that company has likely 'kitchen sinked' its loss provisions but the risk will not be extinguished until the projects are complete. Anecdotes of staff losses and project issues persist."

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The post-fire rebuild is unlikely to be fast or easy, but what had already left construction chiefs stunned is the length of time the $703m NZICC was already taking to complete and all its issues, compared to the $790m Westfield Newmarket rebuild where much has been opened and everything is due to open before Christmas.

How can a two-block 88,150sq m, seven-level, 2770-carpark project as complex as the mall, involving retention of some buildings while being linked into new structures, go so well and so fast, taking just two years, while across town the 85,000sq m, 1327-carpark convention centre is taking so much longer, at three years already and now heading backwards?

At the mall, shops, restaurants and carparks are open. The convention centre looks like a war zone.

Yet the jobs are of a similar scale. Both are relatively low at seven to eight levels, but sprawling. Both involved airbridges and they're of similar value. The mall is 51 per cent owned by ASX-listed Scentre Group with a $A20b market capitalisation, and 49 per cent by the Singapore Government's property business, while the convention centre is owned by SkyCity, with a $2.6b market capitalisation.

While SkyCity stumps up the money for this key piece of infrastructure, in Christchurch the Government is funding the $475m Te Pae convention centre in the middle of town, due to open next October. Is that fair?

Tuesday afternoon, when the fire broke out. Photo / Jason Oxenham

Now, we're unlikely see any builders around Hobson or Nelson streets until perhaps next winter at the earliest.

Fletcher chief executive Ross Taylor said on Thursday it would be "a number of months" before subsidiary Fletcher Construction could re-restart building. A multi-stage process would begin and the site would be handed back to the builder after investigations into the cause of the fire and the extent of the damage.

The fire's timing is especially unfortunate: Taylor is in turnaround mode, trying to make the business less risky, stabilise divisions, strengthen the company financially, move away from bigger projects and take on more mid-sized jobs, working only for the "right clients" who accept sensible risk profiles and margins.

Albion protected and saved. Photo / Khalia Strong

Pre-fire, he already had big wins, even if Fletcher was being tipped as a potential takeover target, last year's vultures named as China Communications Construction, China State Construction or China National Building Materials.

"The sale of Formica for $1.2b materially strengthened the company's balance sheet," Fletcher said a few weeks ago. "We have commenced our $700-$800 million debt reduction and will distribute up to $300m to shareholders through an on-market share buyback."

The balance sheet has never looked stronger lately:
• 2018's $190m loss was converted into 2019's $164m net profit after tax.
• The dividend was reinstated after its suspension in 2018, with a 15cps payout declared last month.
• A $300m share buyback was announced last month to strengthen the accounts.
• A five-year strategy was announced last winter, with a re-focusing on Australasian.
• The company is now cashed up from the $1.2b sale of Formica and its roof tile business.

At an investor day in June, Fletcher said it was refocusing and stabilising construction and forecast the turnaround to be finished by 2021-23. It listed projects remaining in the B+I (building and interiors) division as Commercial Bay, the NZICC, Christchurch International Airport Hotel, MPI National Bio Labs, GreyBase Hospital, Rhodes on Cashmere retirement village for Arvida, and Wellington International Airport Carpark.

Stephens and Taylor at the Wednesday 10am conference. Photo / Jason Oxenham

Instead of $1.4b of work in 2018, B+I had only $0.4b by June and "only Commercial Bay and NZICC will continue into calendar 2020".

Pre-fire, the perception was that the troubled mega-projects were ending soon.

At Wednesday's press conference with SkyCity chief executive Graeme Stephens, Taylor
ruled out full demolition of the convention centre, saying repair was planned. "Where the fire is, it's above level five broadly so structural damage is going to be above that level and possibly the perimeter but we just don't know until we get up there. The other damage is water," he said.

Asked about payments to subcontractors, Taylor said: "They're not our employees. The other backdrop I'd say is Auckland's very busy. Our battle has been actually holding people on sites. So we make sure we don't put people in a position where they suffer and there's a transition so that's the approach we're taking. Right now we continue to pay until we work out the timelines."

And, as Solly observed, Taylor hinted that insurance could actually stimulate the sector. "We've got a very large rebuild to do here, so it's a significant project, so we'll put workload into the industry. I just can't speak on the timing yet," he said.

He remained bullish, despite the prospect of many months of delays before work resumes, and all the labour, material, cost, contract and insurance complications the business could face.

A Ministry of Business, Innovation and Employment report found the construction sector will produce a record $39b worth of work this year, rising to $42b a year in two years.

Fire broke out just after 1pm on Tuesday. Photo / Jason Oxenham

Taylor physically flinched when asked to name the insurer and referred the question to SkyCity's Stephens, who said it was an international business "but we're comfortable with the credibility of the insurer and their ability to meet their obligations".

When one reporter's phone chimed out loudly before him "your destination is on the left," Taylor paused, his hand raised in mid-air, closed his eyes and shook his head in amusement.

But he literally shrugged off suggestions that the NZICC is too much of a challenge. "The project is insured with both project works and public liability insurance. Fletcher is committed to get the project finished and we will."

He then smiled, shrugged off the doubters and turned right for the next question.

FLETCHER BUILDING B+I major projects:

• Commercial Bay
• NZ International Convention Centre
• Christchurch International Airport Hotel
• MPI National Bio Labs
• GreyBase Hospital
• Rhodes on Cashmere retirement village by Arvida
• Wellington International Airport Carpark