Fletcher Building stock has been downgraded a day after it revealed it had project-managed its way into an estimated $952million loss accumulated by its Building + Interiors division.
Key concerns of brokers at Craigs Investment Partners and Forsyth Barr are the cost of Fletcher’s renegotiations with its two main lenders, who between them have $2.4billion on loan or available, and also the possibility of divisional asset sales to repay mounting debt.
Of 14 B+I projects recently scrutinised, the Auckland international convention centre and Hobson St hotel are expected to lose $410million and Christchurch’s justice and emergency precinct losses are around $156million.
Fletcher shares were down only slightly yesterday after morning trading, at $7.03. That was down 32% on a year ago.
Craigs Investment Partners broker Peter McIntyre said the stock had been shifted from "buy" to "hold", the target price was reduced almost 10% from $8.37 to $7.57 and both the earnings before interest and tax and after-tax profit were downgraded, by 93% and 149%, respectively.
"Notwithstanding the downgrade, which was both comprehensive and conservative, we continue to believe business rationalisation is required," he said.
He said it was positive Fletcher had withdrawn from bidding for large commercial projects which B+I had been doing, to focus solely on completing the existing projects.
However, despite the positive steps, Mr McIntyre highlighted new covenant terms had to be agreed with Fletcher’s main lenders.
"Given the systemic issues in the B+I business, we continue to believe Fletcher’s Infrastructure [one of three other divisions within the construction] projects remain a risk, given their relatively early stage," he said.
Forsyth barr broker Damian Foster was maintaining a "neutral" recommendation on the stock, but its target price was lowered to $6.90 and forecasts of earnings per share over the next three years declined.
"The key uncertainties are the outcome of Fletcher’s engagement with its debt-holders, and its path to debt reduction," he said.
He said Fletcher was "very confident" it would not be asked to repay loans nor would penalty payments and/or higher lending margins have a "material impact".
However, Mr Foster said debt was expected to peak this year at $2.3 billion to $2.4 billion and options to lower debt included divisional asset sales, not paying a dividend or raising new equity.
