Fletcher faces tough road back after $642m rescue raising

The embattled Fletcher Building has won the support of its major shareholder after launching a dramatic $NZ700m equity raising, but the company faces a long path to recovery.

Fletcher Building’s new CEO Andrew Reding said market conditions were challenging and the raising provided head room and flexibility for the company to focus on operational performance. Picture: Thinkstock

The embattled Fletcher Building has won the support of its major shareholder after launching a dramatic $NZ700m ($642.09m) equity raising, but the company faces a long path to recovery.

The building materials company on Monday launched a $NZ418m rights issue and a $NZ282m placement which freshly minted chief executive Andrew Reding said would cut debt and restore the company’s balance sheet.

The move by the embattled Australia and New Zealand company to undertake an equity raising was revealed by The Australian and came months after its former management reassured investors a cash call was off the table. The raise was handled by investment bank Jarden.

Mr Reding said the raising was a “proactive response to continuing macro pressures, taking the business in a good position by improving financial stability and resilience in the current environment”. He said market conditions were challenging and the raising provided head room and flexibility for the company to focus on operational performance.

“We are dealing with very challenging markets with regard to Australia and New Zealand, particularly in the residential sector,” he said.

“That said, we have strong and well-positioned businesses with leading market positions and we continue to focus on cost reduction to mitigate further downside risk with significant operating leverage once market volumes recover,” Mr Reding added.

He said that despite the challenging market conditions it had continued to execute on key initiatives. The Fletcher Building chief executive said the company had made “meaningful progress” in settling issues relating to its West Australian plumbing business, with an agreement on the joint industry response unveiled last month.

Fletcher Building said this would take product recall off the table and it had previously disclosed a provision of $155m, which mainly comprised estimated repair costs and the supply and installation of leak detectors in eligible WA homes.

But the company has the backing of its largest shareholder Allan Gray, which has a stake of about 14.1 per cent, despite its earlier opposition to a raising.

Allan Gray chief investment officer Simon Mawhinney had not supported the move ahead of raising but is now optimistic about the company’s prospects.

“While we prefer companies to address stretched balance sheets the old-fashioned way – via earnings retentions – this raising might be effective in giving the company some necessary breathing room,” he said.

“The economic headwinds that Fletcher is facing into are significant and it has never been more important to operate its privileged asset base as efficiently as possible. This, together with improved capital allocation discipline and a cultural reset which prioritises humility over arrogance, will hopefully see Fletcher’s former greatness restored. We have chosen to support the company on its journey,” Mr Mawhinney said.

Allan Gray chief investment officer Simon Mawhinney.

But the company faces questions about its return to financial health as it is still on the hunt for a partner on its residential development division, with Mr Reding telling investors this could be drawn out. “I don’t think that will be a quick conclusion to that process,” he said.

Citi analyst Samuel Seow noted the raising was a textbook move by a new chief executive. “Although the timing is more delayed than our expectations, it clears the overhang around the balance sheet and ability to ride out legacy issues/macro concerns for the business,” Mr Seow said.

He said that while the dilution for shareholders was material – and probably could have been reduced by going earlier – it was a net positive for the business, in particular given the rate cut cycle had begun in New Zealand. Citi said that details on the pipes joint industry response appeared largely in line with past announcements and it saw no changes to legacy provisions on NZ projects.

Other analysts welcomed the boost to Fletcher Building’s balance sheet. Forsyth Barr senior analyst Rohan Koreman-Smit said that net debt had reduced from $NZ1.8bn to $NZ1.1bn.

“Given a new incoming management team, our forecasts for an extended period of elevated debt levels, and Fletcher Building’s significant earnings leverage to a challenging operating environment, this equity raise is unsurprising,” he said.

The placement price is $NZ2.40 per share, a steep 17 per cent discount to Friday’s closing price. Mr Koreman-Smit said that over the last 20 years Fletcher Building had raised about $NZ3.5bn of equity compared to about $NZ4bn returned to shareholders via dividends and buybacks and a $NZ150m increase in net debt.

He said Fletcher Building’s capital allocation has been poor, with significant items of $NZ2.5bn over the last 20 years largely contained to its Australian and Construction divisions.

Fletcher Building had also provided a trading update with volumes in materials and distributions divisions down 10-15 per cent in July and August, continued margin pressure, and a slower pace of home sales. It still expects fiscal 2025 volumes to be down 10-15 per cent on fiscal 2024 and is targeting gross overhead cost savings of $NZ180m.

“The near-term outlook is expected to remain challenging. However, our underlying business remains strong and this equity raising further enhances our balance sheet position and ability to withstand market headwinds,” Mr Reding said.

The company said it saw a material decline in Australia and New Zealand residential sector activity from their respective market peaks to March 2024. But Mr Reding said the underlying business was well positioned, with significant operating leverage expected once the volumes recover, and was looking to cut costs by $NZ180m.