Forsyth Barr broker Damian Foster said the principal new message from the recent restructuring announcement in Sydney 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," Mr Foster said.
Fletcher’s Buildings + Interiors (B+I) division has posted actual and accumulated losses totalling $952 million over the past two years, from 16 projects that were mainly fixed price contracts, prompting it to raise $750 million capital from shareholders and renegotiate its banking facilities.
Several assets, including Formica and Roof Tile Group, are for sale, and late last week Fletcher announced it was selling its 50% stake in metal recycling company Sims Pacific Metals for $42 million.
Fletcher’s new chief executive, Ross Taylor, announced expectations of an annual $30 million of savings for each of the next three years last week, albeit alongside restructuring costs of $95 million.
Fletcher has ringfenced the B+I losses this financial year of $660 million and otherwise still expects its full-year ebit in a range of $680 million-$720 million, but potentially with more business asset value writedowns.
Mr 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 distribution division to oversee Australia.
"Fletcher believes its historically poor Australian performance is primarily due to mismanagement, rather than anything structural," Mr 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.
Mr Foster said while Forsyth Barr had revised its earnings per share downward, given Fletcher’s guidance of higher interest costs and capital expenditure, a more thorough review was due in the weeks ahead.
Fletcher’s target price was left unchanged at $6.50, Mr Foster said.
He said Fletcher’s near-term outlook was "broadly stable", but with its cash flow low.
Mr 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, Mr Foster said given the cash flow reference, he did not expect dividends at the same level as the 2017 financial year.
• Fletcher is selling its stake in metal recycling company Sims Pacific Metals for $42 million as part of its new strategy to refocus on core businesses, BusinessDesk has reported.
The half-share would be sold to its partner in the Sims Pacific joint venture, Sims Metals Management, Fletcher said.
Total proceeds from the sale are expected to be between $50 million and $60 million as the purchase price is "subject to a working capital adjustment which will be finalised post acquisition". The joint venture was established in 1992 and is New Zealand’s largest metal recycling company.
The joint venture operates nine recycling facilities, including two metal shredders, and employs more than 170 staff handling 350,000 tonnes of metal recycling a year.
