Bad headlines about Fletcher Building have overshadowed a business with "healthy prospects" and a new management team that is "a catalyst for change", says listed investment fund Kingfish.
The fund overseen by Fisher Funds Management added Fletcher to its portfolio in April, when the shares slumped to their lowest levels in almost six years. Last month Auckland-based Fletcher unveiled a $1.25 billion refinancing plan including a deeply discounted offer to shareholders to raise $750 million and a $500 million standby banking facility that could be used to repay noteholders in the US private placement market.
The company also announced plans to sell its Formica and steel roofing tiles businesses after a strategic review, retreating to its main New Zealand and Australian markets. Fletcher dumped its former chief executive last year in the face of losses at its Building + Interiors unit and in February this year chair Ralph Norris said he would step down to take responsibility for the company's poor performance. Still, excluding B+I the company has kept full-year earnings guidance unchanged and new CEO Ross Taylor has helped restore confidence, undertaking a full strategic review of Fletcher.
"The company has made too many newspaper headlines with delays on major construction projects and the significant losses reported by its B+I unit," said Sam Dickie, senior portfolio manager at Fisher Funds, in an update from Kingfish. "It is fair to say this has been a company with a chequered track record facing a number of challenges. We believe the headlines, and the fallout from some of Fletcher’s poor strategic decisions, are hiding a business that has healthy prospects. New management is the catalyst for change."
Among stories reflecting badly on Fletcher, an NBR column was headlined: 'Fletcher Building disaster highlights gaping hole in boardroom skill set' and referred to 'The train wreck that is Fletcher Building'.
Dickie said that after watching Fletcher for the past 12-18 months, "we believe a rare attractive opportunity is emerging which justifies an investment."
Kingfish hasn't disclosed a substantial holding in Fletcher since April, suggesting it picked up less than 5 percent of the company during its equity raising last month. The fund, which invests in New Zealand companies, counts Fisher & Paykel Healthcare and Mainfreight as its biggest holdings, at 12 percent each, followed by Freightways and A2 Milk on 9 percent apiece, and 7 percent made up of Ryman Healthcare. Total shareholder return in the past 12 months has been 18.1 percent.
Dickie said that after "years of distracting international acquisitions and diversification away from key operations, the company’s decision to sell its overseas businesses (Formica and Roof Tiles are currently up for sale) makes sense. This is likely to generate in excess of $1 billion for the company and may result in it being able to return capital to shareholders."
The comprehensive restructure of the business "presents both cost savings and potential revenue growth opportunities," he said. "All up we think these initiatives could add $30 million-$50 million to its core earnings." He said that "for the first time in Kingfish’s history we are encouraged by what we see at Fletcher Building."
Fletcher shares last traded at $6.37 and may be helped today by news it has been retained in a key MSCI index that means index-weighted funds will continue to hold the shares.