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29/6/2018 — General
Fletcher’s Australian growth in question
By Simon Hartley

Beleaguered Fletcher Building Ltd's (NZX & ASX: FBU) ambitions in Australia are not going to be straightforward as it grapples with its wide-ranging restructuring plans, announced last week in Sydney.

Forsyth Barr broker Damian Foster said the principal new message from the Sydney announcement was the “considerable ambition” Fletcher has for its Australian operations to double earnings before interest and tax (ebit) over the next five years.

“This won’t be straightforward given the competitive and cyclical (construction sector) backdrop,” Foster said.

Fletcher's Buildings + Interiors division has posted actual and accumulated losses totaling $952 million over the past two years, from 16 projects which were mainly fixed price contracts, prompting it to raise $750 M capital from shareholders, and renegotiate its banking facilities.

Fletcher's new chief executive Ross Taylor announced last week expectations of an annual $30 M of savings for each of the next three years, albeit alongside restructuring costs of $95 M.

Fletcher has ring-fenced the B+I losses this financial year of $660 M and otherwise still expects its full year ebit in a range of $680 M-$720 M; but potentially with more business asset value writedowns.

Taylor said Fletcher had only a 1% market share of Australia, and all its divisions would now be operating under one banner, with an experienced and successful chief executive moved from Fletcher's s distribution division to oversee Australia.

Foster said Fletcher is aiming to double its Australian ebit, but a lift of about $A120 M ($NZ129.7 M) over the next five years.

“Fletcher believes its historic poor Australian performance is primarily due to mismanagement, rather than anything structural,” Foster said.

He said in Australia there was a lack of cyclical support across the construction sector at present with a “potential headwind” from an easing in residential work.

“It's difficult to have a high level of confidence in the delivery at this time given the history of disappointment and competitive environments in which Fletcher's Australian businesses operate,” he said.

Foster said while Forsyth Barr had revised its earnings per share downward, given Fletcher's guidance of higher interest costs and capital expenditure, and “more fulsome review” was due in the weeks ahead.

Fletcher's target price was left unchanged at $6.50, .He said Fletcher's near-term outlook was “broadly stable,” but with its cash flow low.

Foster said the combination of interest charges, capital expenditure and actual realisation of the B+I losses would crimp Fletcher's near term free cash flows.

While Fletcher said it would reinstate dividends in full year 2019, Foster said given the cash flow reference he did not expect dividends at the same level as the 2017 financial year.

*Simon Hartley is senior business reporter and assistant chief reporter for the Otago Daily Times.

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