Sir Ralph Norris laughing all the way to the bank
Fletcher Building, as telegraphed by their share trading halt last week, today announced further dire losses from their Building and Interiors unit that sent their shares plunging another 12% to $6.87.
The company said it was suspending the shareholder interim dividend and was in breach of covenants to its banks and bond holders.
But it seems the company’s seven directors will keep most of their enormous fees.
Chairman Sir Ralph Norris announced he would fall on his sword, following the forced resignation of former CEO Mark Adamson in March when the company made the second announcement of problems at the Building unit.
At the third announcement in October, Norris apologised to shareholders, saying directors took responsibility and would therefore take a 20% cut in the $200,000+ directors’ fees with Norris’ $426,000 fee taking a similar trim.
Norris has acknowledged some personal responsibility for the problems by resigning. He has overseen the Building unit lose close to $1 billion in two years, but there was silence on whether the directors should take another haircut on fees. When contacted today, Norris refused to comment about the need for a further cut.
The latest announcement of further losses in the building unit has angered shareholders and analysts.
The losses are bad enough but Fletcher has seriously damaged its credibility by having four goes at getting this right. The fact that the board failed to get on top of this problem that was exposed over a year ago reveals their collective failure.
At the analysts briefing after today’s announcement, Citi Research Equities analyst Simon Thackray queried how it was that the company said in October that accounting firm KPMG had done a “comprehensive” review but then more losses had emerged.
“I’m trying to understand how KPMG were so emphatic in October,” he said.
Ironically, most of the losses — $410 million – have stemmed from the controversial Sky City Convention Centre, where the John Key-led National government traded off laxer gambling rules in exchange for getting the centre built. Questions were raised also about the openness of the tender process that Fletcher Building won.
The Building + Interiors division lost $292m in the June 30, 2017 year but a further $660m of losses are now projected in the current June, 2018 year.
Norris blamed grossly wrong quantity surveyor estimates, rising building costs and the flow of communication from management to the board as reasons for losses.
Fletcher’s banks, owed $1.3 billion, have agreed to an interim waiver on breached banking covenants, but you can be sure they will demand higher interest rates. Arrangements will be reviewed in June.
However, Fletcher may have more problems over another $1.13 billion owed to a US Private Placement syndicate. There are three tranches of this debt and over half of the lenders have to agree to the waiver of the breached covenants.
New Fletcher CEO Ross Taylor, who exuded smiles and confidence at a news conference despite accepting the ceo role hospital pass, gave all sorts of assurances that everything has hunkey dorey – no asset sales had been demanded by banks, no new capital was required and while debt lines were pretty fully drawn other than working capital, cash flow was okay.
He wasn’t so smiley about the million Fletcher shares he was forced to buy as part of getting the job and now under water.
Mark Lister, head of private wealth research at Craigs Investment Partners, said the Fletcher share price plunge could have been much greater if the company had planned a big capital raising to rectify its debt problems, as some in the market had suggested.
“It was a good result considering it could have been much worse than that if they had had to do a dirty great big capital raising,” he said.
Taylor said that other than completing existing projects, the B&I unit was getting out of the business. That means that that unit within the Fletcher conglomerate is now worse than worthless.
How a building company has managed to lose money in what analysts say has been the biggest construction boom in nearly a century is mind boggling and really the whole of the Fletcher board should resign – not just forego all their fees.
Before today, Fletcher shares were already down over 23% on a year ago in a bull market that saw the NZX rise 22% in 2017. Just two years ago Fletcher was the country’s largest listed company by value. Now, it is well down the chain.
Share market commentator Brian Gaynor of Milford Asset Management said Fletcher’s board was too shallow and wide, full of lawyers and accountants while lacking construction industry knowledge. He said decisions to move from being an integrated conglomerate to a diversified one, with purchases of international companies Formica and Crane Group, were ill-advised.
Norris denied lack of construction industry knowledge and noted Taylor, who is not on the board, has expertise in this area.
(Simon Louisson is a retired journalist who reported for The Wall Street Journal, AP Dow Jones Newswires, New Zealand Press Association and Reuters and briefly was a political and media adviser to the Green Party.)
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