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Tone deaf Fletcher directors keep stumbling at hurdles

Tone deaf – that’s the most apt description summing up the attitude of Fletcher Building’s directors at the annual shareholders’ meeting earlier this month.

Leave aside for the moment all the reasons shareholders have to be aggrieved at the destruction of shareholder wealth during the past couple of years.

For a second year running, those protesting Fletcher’s planned 480-house development at Mangere near the airport grabbed the spotlight during question time.

Since Fletcher had just chalked up a victory, with the Environment Court rejecting an appeal by the Maori land protestors trying to halt the development, you’d think the company would have anticipated the protesters would be turning up to the AGM.

It took several questions and a touch of empathy from the sole director standing for re-election, Steve Vamos, to comprehensively deliver an answer to the protestors’ questions that the company arguably should have pre-empted.

The protesters want to protect the Otuataua Stonefields which adjoin the development site and have archaeological significance.

Vamos said he supports the Fletcher development “but I do want to say, though, that the passion and emotion of those opposed is something that has not been lost on this board. It has been something that we respect,” he said.

“We have, for that reason, spent even more time than we might otherwise really trying to understand the issues behind the concerns and therefore have, in my view, adequately considered and come to a conclusion that I fully support. Thank you for your passion.”

One of the protestors acknowledged Vamos by describing him as “probably the most compassionate” of the directors.

The company went on to explain that its development won’t be touching the historic Stonefields. It will only build on 25 hectares of the 33.4 ha site and won't be able to build on the buffer zone adjoining the Stonefields because that additional land will be given to either Auckland Council or the local iwi – discussions for which are underway.

As for Fletcher’s woeful performance, even after investors tipped in another $750 million of fresh capital earlier this year, its current market capitalisation (at Friday, Nov. 23) is $1.2 billion lower than it began 2017.

Vamos again seemed the director taking the most responsibility for that.

“I’m acutely aware that the last two years in particular have been a difficult and concerning time for our shareholders,” he told the AGM, adding that he wants to remain on the board until efforts to turn the company around start to bear fruit.

Most of the losses have been on high-profile projects, such as the Christchurch Justice Precinct and the Sky City convention centre, of Fletcher’s high-rise builder, Building + Interiors. Its losses in the year ended June are estimated at $660 million, on top of the $292 million that unit lost the previous year.

But the company also wrote $222 million of its Tradelink and Iplex Australia businesses last year while the latest clanger delivered at the AGM is that first-half operating profit this year will be 10 percent lower than last year.

As well, earnings before interest and tax for the year ending June are expected to be $630-680 million before any “significant items,” compared with the previous year’s $710 million before the $660 million of B+I losses.

Another reason for investors to be irked is that even before completing the Formica sale – managing director Ross Taylor says that should be completed in the first quarter of 2019 – and despite Fletcher’s abysmal track record on acquisitions, the company was prepared to spend more than $300 million on its short-lived takeover bid for Steel & Tube.

Analysts still expect Formica to fetch $1-1.3 billion, not much of a return on the $960 million Fletcher paid in 2007 at the top of the last cycle.

Back in June, Taylor outlined Fletcher’s new strategy of sticking to its Australian and New Zealand operations and on doubling its profit margins in Australia to bring operations in that country up to the same level of profitability as the New Zealand operations.

Any acquisitions would be bolt-ons, Taylor said then and insists that Steel & Tube would have been in that category, though many observers don’t see it that way.

It might have been on strategy for a business that didn’t have the kind of fires to put out that Fletcher has, they say.

And then there’s the inevitable Commerce Commission problems which would have added a distraction management can’t afford.

Taylor also says he demonstrated “deal discipline” by walking away from that acquisition when Steel & Tube’s board wouldn’t play ball.

But analysts scoff at that. They're mystified as to why Fletcher didn’t buy Milford Asset Management’s 15.8 percent stake in Steel & Tube - or at least get lock-in agreements from it and other shareholders. Instead, Australia-based steel company BlueScope swooped in and paid $46 million for the Milford stake, effectively blocking Fletcher’s takeover and forcing it to walk away.

Not a lot of discipline on display there, the analysts say.

Another shareholder beef is that although Fletcher was prepared to stump up so much cash for Steel & Tube, it isn’t ready to guarantee its long-suffering shareholders a dividend.

One reason the latest profit downgrade precipitated the latest sell off of Fletcher shares – down to $4.54, the lowest level since 2004 – is that analysts feel Taylor over-promised at the Investor Day back in June.

The Australian construction and housing markets were peaking but Taylor said the improvements Fletcher was going to make to its businesses across the Tasman wouldn’t be linked to the cycle.

And then the company says its latest downgrade is due to “emerging challenging Australian trading conditions.”

Given that, promising a 100 percent increase in Australian profit margin “seems like you were smoking something,” one analyst says.

“It just highlights that management aren’t going to be able to do much into a down cycle.”

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