Fletcher Building: A Rare Opportunity Under Construction
By Sam Dickie, Senior Portfolio Manager
08 May, 2018
Fletcher Building’s woes over the past couple of years have been widely reported. The company has made too many newspaper headlines with delays on major construction projects and the significant losses reported by its building and interiors unit. It is fair to say this has been a company with a chequered track record facing a number of challenges and as a result it has been a smaller holding in our New Zealand portfolio. 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.
During April we made the decision to increase our position in Fletcher Building. Fletcher Building is a company we know well and have followed for many years. I began covering it as a research analyst back in 2000 and at the time liked the fact it had five-six simple divisions, most of which dominated the market. Now, after watching the company closely from the side lines for the past 12-18 months as it endured significant challenges, we believe a rare attractive opportunity is emerging which justifies increasing our investment.
Despite its challenges, Fletcher Building’s key New Zealand operations; Golden Bay Cement, Winstone Wallboards and PlaceMakers dominate their respective markets. These core businesses have, in my view, clear moats and help the company to deliver solid cash flow. This fact hasn’t changed in all the years that I have followed the company. What changed was a number of poorly considered acquisitions and forays into other business lines that clearly did not work.
So what changed?
What’s refocused our attention to the Fletchers of today is the strategic review that has been guided by the new management team. Fletchers has committed to a “back to the future” strategy - selling its overseas business and re-focussing on the strong NZ and Australian core. Fletcher Building is getting back to what it does best.
I am particularly encouraged by Fletcher’s new management team. I have met with new CEO, Ross Taylor, several times over the past few months. Ross has a straightforward demeanour, a clear vision and a keen sense of Fletcher’s strengths as a business. Ross is committed to seeing it return to its former glory. Based on these conversations and feedback from former Fletcher’s executives and industry experts I believe the strategy makes real sense.
There are two key planks to Ross’s strategy – refocussing the business on areas of strength and taking out cost and complexity.
After years of distracting international acquisitions and diversification away from key operations, Fletcher’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 $1bn for the company and may result in it being able to return capital to shareholders.
Fletcher Building also announced a comprehensive restructure of its business. This presents both cost savings and potential revenue growth opportunities. All up we think these initiatives could add $30-$50m to its core earnings.
We will be watching very closely (as always) to ensure our investment thesis is playing out but for the first time in many years we are encouraged by what we see at Fletchers.