Speed catches up with Fletcher Building CEO Mark Adamson

There had been warnings about Fletcher Building’s strategy ahead of today’s surprise CEO exit from the NZ-based firm.

Outgoing Fletcher Building chief Mark Adamson at their offices in Sydney.

The surprise exit of chief executive Mark Adamson from NZ-based Fletcher Building sent the group’s share plummeting and analysts readying downgrades as the company slashed its guidance and announced that impairments could hit $220 million.

While much drama surrounded the exit of Mr Adamson from the venerable New Zealand company chaired by Sir Ralph Norris, analysts have warned about the company’s strategy for some time.

NZ-based Fisher Funds, which does not own shares, published an analysis of how the company went wrong.

In short, Fletcher Building grew too rapidly from its roots as a NZ-focused building materials and construction company into a global building materials and construction conglomerate with more than 20 separate divisions.

The company’s construction backlog ballooned to is three times the size it was at the previous cycle peak. On Fisher’s analysis, this was at the crux of the company’s problems as the scale added complexity and was harder to manage.

While having a construction division allowed Fletcher to exert control over areas where it can market its more profitable building materials, the area has generated unexpected losses.

The company downgraded its forecasts in March after reviewing around 55 per cent of the backlog in its construction division. This resulted in a 15 per cent downgrade to earnings guidance for this financial year and today’s writedowns had been expected as the remainder of the construction division was reviewed.

While a property boom is underway, competition is rising in civil and commercial construction and there are always challenges in pricing long-dated projects with volatile commodity input costs and thin margins.

With Fletcher’s shares down almost 6 per cent to $7.03 brokers are also preparing to cut their forecast to account for the construction woes.

UBS noted that today’s news was Fletcher’s third writedown of its construction business this year and construction earnings are now $245m lower than ahead of the company’s first half result.

Fletcher’s $220m impairment on its Iplex and Tradelink businesses mainly relate to goodwill, with Iplex accounting for about 30 per cent and Tradelink about 70 per cent of this sum.

“Both businesses had faced difficulties and were expected to deliver improved earnings going forward. A recovery is now not expected over the medium-term, however, the impact on fiscal 2017 is limited,” UBS noted.

UBS flagged plans to review its model and warned that a “downside scenario” of its $9.50 valuation would drop to $7.60 if the construction division was excluded.

Fletcher Building (FBU) shares closed down 6 per cent at $7.03.