Fletcher shares tumble as construction woes cut guidance $110m

UPDATE

Fletcher Building shares tumbled 12% 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 division.

The stock fell $1.12 to $8.10 and earlier touched a six-month low of $8.035 when it resumed trading after being halted on Friday pending the announcement. Full-year operating earnings before interest, tax and significant items are expected to be $610-650 million, compared with previous guidance of $720 million to $760 million.

The downgrade comes less than four weeks after Fletcher affirmed its earlier guidance with its first-half results, which included just a $1 million contribution from its New Zealand construction business, despite gross revenue from construction soaring 54% to $1.15 billion in the first half. The slump reflected losses incurred on a major construction project, which it didn't identify, and it kept the identity of the project secret today, citing client confidentiality.

Fletcher Construction's major projects include the $300 million Justice and Emergency Services precinct in Christchurch, which was due to be handed over at the end of this month but according to a Ministry of Justice spokesman quoted by The Press is now not expected to open until the third quarter of 2017 after the company put the handover date back to June 30. The spokesman described the precinct as "the largest multi-agency government co-location project in New Zealand's history."

Chief executive Mark Adamson said it was "extremely regrettable" the profitability in the buildings and interiors unit of the construction business had worsened since the first-half announcement. "It is very disappointing that the review of the B&I (buildings and interiors) business unit has found weaker performance than we had previously understood."

The company was scheduled to hold a conference call this morning.

In its statement, Fletcher indicated there may have been issues in its bidding for major projects, a process which has now been overhauled.

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.

One of the projects was expected to be completed within the next few months and the other has a target date for the 2019 financial year. Fletcher said the main problems were in the complexity of design, subcontractor management and building programme delivery, which delayed the projects and led to higher costs.

As a result, Fletcher has appointed a chief operating officer and a new head of risk and governance for the construction division, while a new general manager of the B&I unit will start soon.

"We have new finance leadership and processes along with the recent implementation of a new financial management reporting system," the company said. "The criteria for bidding major construction projects have been made more stringent, and internal review processes for proposed and existing projects have been strengthened."

As one of the country's biggest building firms, Fletcher participates in many major development projects.

It has a construction backlog of about $2.7 billion of which about $1.5 billion is in the B&I business. All but one of its major projects under way in B&I is either a "fixed price lump sum" or "guaranteed maximum price" contract, which was standard practice in the commercial construction industry, it said today.

The company said growth in the B&I business wasn't driven by a deliberate strategy to boost volume growth for its building products division, which traded with the construction division on an arm's length basis.

Other major construction projects include Auckland's convention centre and Hobson St hotel, a $700 million contract, the $425 million Commercial Bay development in Auckland for Precinct Properties, and roading work including the Waterview Connection, and Puhoi to Warkworth.

(BusinessDesk)