FLETCHER Building's $515 million share wipeout yesterday shows the difference between warning that conditions are tough and then translating that into profit forecasts.
Fletcher, which lost its position as New Zealand's second-largest listed company to Contact Energy as a result of the 12 per cent fall in its stock to $A5.43, did not really shift its position a long way from the outlook statements that it has been giving in the past two months.
It has been saying for some time that it expected at best modest improvements in Australia and New Zealand, that Europe and North America were likely to be flat, and that Asia was the only growth market.
Yesterday's statement to the market that sparked the sell-off, reportedly its worst one-day dip in a decade and a half, said that even those modest expectations for NZ and Australia were now off the table for this financial year. The group said that it now expects earnings to be 10 per cent lower than 2010's $NZ166 million ($A130 million) for the December half year, and is hopeful that in the full year net profit will be "similar" to the $NZ359 million unveiled two months ago.
Unfortunately for Fletcher, a "no growth" earnings outcome this financial year is not the same as a "flat" result because it spent $A800 million in January buying out complementary building products company Crane Group. In a normal year, Crane was producing about $A40 million of profit, so even if Fletcher did nothing to lower costs after its acquisition, and plunder the benefits of blending the businesses, investors could reasonably have expected a result closer to $NZ400 million this year.
So Fletcher has effectively spent $A800 million to get a smaller profit. Worse still, there is just a chance that the harsh treatment meted out by the market is not only a function of it losing its growth premium.
Barely two weeks ago, Fletcher did a series of presentations to analysts and investors on the state of its businesses, but clearly did not raise the red flag at that time.
Insider reckons that Fletcher's share price since then indicates that while analysts may not have come out of those briefings with a view "buy with your ears pinned back", they certainly did not leave overly negative. Fletcher's stock actually gained from slightly under $A6 a share to about $6.20 before yesterday.
In Fletcher's defence, the briefings were on September 28 so it would not have ruled off its books for the first quarter until a few days after that, and presumably the profit warning reflects the result of reviewing those numbers and forward orders.
While markets are absolutely brutal to stocks like Fletcher that lose their gloss, Insider would not be surprised to see the stock regain some of the lost ground in the absence of any broader market retreat if for no other reason than that the attention spans of short sellers and those who exploit volatility are notoriously short.
Perpetual motion
FETED, and then ill-fated, funds manager Peter Morgan is still a fan of the brand and investment principles where he made his name, Perpetual.
Morgan, who these days invests his own money after an industry sabbatical, spoke at an informal lunch yesterday with a variety of market animals in the offices of ASX-listed and Otto Buttula-chaired Investorfirst Securities.
He is less enamoured of the board and management at Perpetual these days, thinking it is missing opportunities to properly build on its reputation and customer loyalty.
To Insider's thinking, it is a market oddity that none of the big four banks that have been rushing into building wealth management businesses have touched on Perpetual. The only tentative offer so far has been from a private equity fund, Kohlberg Kravis Roberts, and that was rebuffed at the end of last year. Since then, and amid its cack-handed handling of the speculation surrounding the future of Morgan's successor, John Sevior, Perpetual has slumped from around $1.7 billion in market value to as low as $900 million two weeks ago. It is only now back to $1.1 billion, which is about where it bottomed in the bad days of the GFC in early 2009.
Morgan also made an excellent point about the funds management industry that unlike the public companies that institutional investors are content to criticise for their salary excesses, the salaries and bonuses handed out in the industry of managing other people's funds are rarely revealed. Meanwhile, the value-seeking Morgan reckons that, unlike what many might think, the current sharemarket abounds in value particularly if you look well outside the over-shopped Top 200 companies.
Insider cannot help but agree that with the majority of funds managers and algorithmic traders spending most of their time trying to at least replicate if not beat the performance of the S&P/ASX 200 index, there are higher yielding options elsewhere.
Austock settlement
AUSTOCK yesterday announced that it had settled out of court with the liquidators of what remains of Eddy Groves' ABC Learning Centres for an amount that Insider suspects was probably less than half the $2.7 million that was being claimed.
The claim against Austock from ABC, or ZYX Learning Centres as it it has been cutely renamed on the way to the knacker's yard, related to so-called preferential payments in the last six months before its collapse.
Clearly both sides thought a commercial deal was better than lots of lawyers' fees. Given that the liquidators have to file accounts with the corporate watchdog to disclose receipts and expenses, Insider wonders how the confidentiality clause will be applied.
And if the amount was not material to Austock, it will barely make a ripple on the sea of red ink left behind by ZYX. The most recent report totted up $2.75 billion in claims from banks, unsecured creditors, once-were-shareholders and employees that are unlikely ever to be fully satisfied.
The attention spans of short sellers and those who exploit volatility are notoriously short.
Frequently Asked Questions about this Article…
Why did Fletcher Building's share price fall so sharply?
Fletcher Building issued a profit warning that trimmed its outlook for the current financial year, saying even modest expectations for New Zealand and Australia were off the table. The market reacted badly — the stock fell about 12% to A$5.43 (reportedly its worst one-day dip in a decade and a half) and the company lost its position as New Zealand's second-largest listed company to Contact Energy.
How did the Crane Group acquisition affect Fletcher's earnings outlook?
Fletcher spent about A$800 million in January to buy Crane Group, which typically produced roughly A$40 million of profit in a normal year. That acquisition raised investor expectations for higher full-year profit (closer to NZ$400 million), so Fletcher's warning of a 'no growth' outcome made it look like the company effectively paid A$800 million for a smaller-than-expected profit boost.
What did Fletcher say about regional market conditions and where it sees growth?
Before the warning, Fletcher had said it expected at best modest improvements in Australia and New Zealand, flat conditions in Europe and North America, and that Asia was the only growth market. The recent statement revised that view, saying even the modest expectations for Australia and New Zealand were now off the table for this financial year.
What did Fletcher's profit warning actually mean for investors' understanding of its business?
The profit warning signalled that a recent review of first-quarter numbers and forward orders showed weaker performance than expected. It contrasted with analyst briefings Fletcher held in late September, where no major red flags were raised publicly. For investors, it underscored that company updates can change quickly once internal reviews are completed and that market sentiment can be brutal when a company loses its growth premium.
Is there a chance Fletcher's share price could recover after the sell-off?
The article suggests a recovery is possible if there isn't a broader market retreat. Insider noted that short sellers and volatility traders often have short attention spans, so the stock could regain some lost ground in the absence of wider market weakness — but volatility and sentiment can remain elevated after a major profit warning.
What is the situation with Perpetual and why should investors care?
Veteran funds manager Peter Morgan criticised Perpetual's board and management for missing opportunities. Perpetual's market value slumped from about $1.7 billion to as low as $900 million and has since recovered to around $1.1 billion. The article also highlights concerns about transparency in the funds-management industry (salaries and bonuses are rarely revealed) and suggests investors may find value outside the heavily traded Top 200 companies.
What was Austock's settlement with the ABC Learning liquidators about?
Austock announced it had settled out of court with the liquidators of ABC Learning Centres (renamed ZYX Learning Centres) over a claim related to alleged preferential payments in the six months before ABC's collapse. Insider suspects the settlement was likely less than half of the $2.7 million that had been claimed, and the deal included confidentiality that may limit public disclosure of the exact amount.
What broader investment lessons does the article highlight for everyday investors?
The article emphasises a few practical lessons: profit warnings can appear quickly after internal reviews and can trigger severe market reactions; acquisitions can change expected earnings outcomes (as with Fletcher and Crane); and there can be value outside the over-shopped Top 200 companies. It also notes that market volatility is often driven by short-term traders, so long-term investors may find opportunities if they look beyond headline noise.
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