February 14, 2018 / 6:36 AM / a year ago

UPDATE 3-NZ's Fletcher exiting commercial construction business as losses mount

* Fletcher expects losses of NZ$660 mln in building business

* Chairman to step down

* Shares fall 14 pct after trading halt lifts (Recasts, adds comments from management and analyst)

By Charlotte Greenfield

WELLINGTON, Feb 14 (Reuters) - New Zealand’s largest construction company, Fletcher Building, will wind down its commercial construction business due to mounting losses, but the embattled firm said it was not at risk of missing debt payments or being forced to sell assets.

Reeling from cost overruns and deep losses in major projects, New Zealand’s second-largest company by revenue flagged on Wednesday losses of NZ$660 million ($480 million) for fiscal 2018 in its building and interiors (B and I) unit - the fourth downgrade in less than a year and more than four times larger than previously forecast.

Chairman Ralph Norris announced he would step down and the company said, for the first time in its history, that it would not pay out a dividend for the first half of the financial year.

That underscored the pressure on the builder as it negotiates with lenders over breaches of its financing covenants, which it announced last week when it requested a trading halt on it shares.

When trade resumed on Wednesday, the shares immediately plunged 14 percent to NZ$6.70, a two-year low. The stock ended the day down 9 percent at NZ$7.05.

Cost blowouts at Fletcher have been blamed on a fast-moving labour market that turned high-profile contracts into liabilities as wage bills ballooned.

“There’s a perfect storm that occurred,” new chief executive Ross Taylor told Reuters.

Taylor, who joined Fletcher in November, said cash flow remained sound and there were no plans to sell assets or raise equity.

The update on Wednesday was seen as an attempt by the new management to come clean on the extent of the problem, but there were still questions about a lack of detail on its debt.

“While no equity raise avoids dilution, it doesn’t provide the finality we believe the market was looking for,” said Andrew Scott, equity analyst at Morgan Stanley.

Fletcher said it 2018 earnings guidance, excluding the buildings segment, remained at NZ$680 million to NZ$720 million.


The firm said it would get out of commercial construction gradually as it finished up its existing projects. It would focus on infrastructure, which Taylor said offered higher profit margins and where cost inflation was not quite as acute.

Taylor said Fletcher was able to make its repayments and would finish negotiating with its lenders by the end of March.

“We’re saying to the banks is...we really need a different way of calculating those covenants and that’s really what we’ve got to work through between now and...March,” he said.

The company said it had a total of NZ$3.1 billion in funding facilities.

Fletcher, which has two major projects under construction in Auckland and Christchurch, warned of cost overruns three times last year. In October it had projected a loss of NZ$160 million.

The warnings shook confidence in company management for failing to benefit from the country’s building boom, which was the biggest in living memory but also pushed up prices as an intense demand for workers lifted wages.

Outgoing chairman Norris said Fletcher had signed contracts with fixed costs, a departure from its usual practice of leaving the risk of inflation on clients as the builder sought to win high-profile contracts such as a convention centre in Auckland from casino operator Sky City.

“The company at the time took on risks...that should more appropriately remain with the client,” Norris told Reuters. ($1 = 1.3657 New Zealand dollars) (Reporting by Ambar Warrick in BENGALURU and Charlotte Greenfield in WELLINGTON; Editing by Peter Graff and Muralikumar Anantharaman)

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