Fletcher Building: Acting sensibly?
All the world's a stage, and last week Fletcher Building fell off. But the company's problems are following a script and a buying opportunity mightn't be far away.
So history never repeats? Bulldust. It happens all the time on the stock market. The travails of New Zealand-based building materials group Fletcher Building (ASX: FBU, and NZE: FBU) are playing out just as they have at countless other companies.
In fact the predictability is helpful if you're hoping to buy stock on the cheap – which, of course, we are. Table 1 shows the script.
Fletcher Building is now in the middle of Act 7. Former chief executive Mark Adamson was sacked in July last year, and new boss Ross Taylor announced significantly higher losses at the company's troubled Building and Interiors division last week. Chairman Ralph Norris promptly fell on his sword, and the interim dividend has been canned.
Act 1: Highly indebted company reports problems
Act 2: Problems get worse
Act 3: Chief executive gets the sack
Act 4: New chief executive appointed
Act 5: New chief says it's even worse than anyone thought
Act 6: Directors issue mea culpas and resign
Act 7: Writedowns; capital raisings; restructurings; dividend cuts
Act 8: Strategic review launched; asset sales contemplated
What's particularly remarkable about the company's performance is that the Buildings and Interiors division will incur losses of NZ$660m in 2018 – during an extraordinary building boom. Norris noted last week (without a hint of irony): ‘Often a boom is worse than a bust'.
Well, when you've agreed to construct fixed-price buildings while costs are soaring, that's what tends to happen.
Into the breach
Also interesting is that the losses mean Fletcher Building has breached its loan covenants. This doesn't happen all that often at large companies and would normally be considered serious enough to launch an immediate capital raising.
Ross Taylor and the board apparently believe Fletcher Building can muddle through without one. They certainly wouldn't be the first management team to stick their fingers in the dyke without realising water is set to spill over the top.
It's possible Taylor already has some asset sales in mind (see Table 1: Act 8). Laminates and panels business Formica should be easy to sell and could raise some cash. Formica caused Fletcher Building all sorts of problems after it was acquired in 2007 by Adamson's predecessor Jonathan Ling – who is thankfully behaving much more sensibly as the chief executive of GUD Holdings (ASX: GUD).
So, with Fletcher Building's share price down about 30% over the past year, is the stock worth buying?
It's certainly more enticing. Based on a brief analysis so far, we'd need the stock to be below A$6.00 to be interested; it's currently around $6.50. Further problems – or that capital raising – might be enough to get it there.
However, we're rarely attracted to building materials companies. They're cyclical, they're capital hogs, and they're prone to management stuff-ups (as the problems in the Buildings and Interiors division show). If you're going to own shares in an average business, you need good management in charge – and, as a general rule, average businesses seem to have trouble attracting the best managers.
When great managers are running the show, even a building materials company can deliver impressive results. Under penny-pinching former chief executive Ralph Waters, Fletcher Building did exactly that.
We upgraded the stock at $3.30 in 2003 and then downgraded it at $11.70 when the company announced it was acquiring Formica in 2007. The rest is history – and so was the $12-odd share price, as remaining shareholders unfortunately discovered.
Since then, Fletcher Building – with its series of decidedly average chief executives and their dud acquisitions – has become a more questionable business. That's why we dropped it from our coverage list several years ago.
With a little more bad news or a weaker share price, though, Fletcher Building might become interesting once again. It's New Zealand's dominant building materials company, which must count for something.
We'll consider Fletcher after reporting season, as it will take time to become familiar with the company again. New chief Ross Taylor will no doubt be doing his darndest to fix the company's problems as soon as possible. As he said of the bad news last week: ‘I do not want to be back doing this again'.
But sometimes businesses get worse before they get better. And that of course, is what creates the truly wonderful buying opportunities. Who knows how Fletcher will turn out but, if there's an opportunity, we'll be ready and waiting.
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