Will resignations cap a decade of disaster for shareholders at FBU?

NZSA Disclaimer

It has been a decade of disaster for Fletcher Building (NZX: FBU) shareholders.

Much has been said about Fletcher Building this week, including NZSA’s own commentary both in the media and via the NZSA blog article (It’s just a flesh wound…) early in the week.

Of course, it isn’t the first time we have been critical of governance at Fletcher Building. As recently as June 2022, Simplicity and NZSA jointly criticised the company over the plasterboard supply shortage impacting the building industry at that time. Ironically enough, the company followed that up with a further (negative) ‘significant item‘ in December 2022 (part of the FY23 accounts), related to the International Convention Centre project.

At the end of FY23, with this provision very much in mind, NZSA’s discussions with FBU centred on how the Board assured themselves as to the risk profile of the business they were governing – also a key element of what we felt had helped to create issues back in mid-2022.

An over-riding memory of those conversations was just how strong the FBU team believes in their story – essentially, the counter-narrative to NZSA’s concerns. The company has been adept at highlighting the legacy nature of the issues they have been dealing with – and that we should all be singing the praises surrounding the sunshine, unicorns and rainbows that are headed shareholders way tomorrow.

It’s a compelling narrative – beautifully told each time – and the fact much of the blame for Fletcher’s woes can be evidenced by issues with ‘legacy’ leads credence to the company’s story. No-one would say that the ICC has been a run-of-the-mill project; the company is quick to highlight that there was no norms or benchmark that could be used to assess cost and/or risk applicable to replacing or repairing damaged steelwork in situ, a fire and dealing with black mould.

As commented last week, the current situation is a lesson in the long-term impacts of poor governance and poor strategy.

Regardless, the issue for shareholders, though, is that the sunshine and unicorns of tomorrow are always just that bit out of reach (and let us not forget about the rainbows).

On February 14th, the company announced yet another impairment ($122m), this time of its Tradelink business in Australia – another casualty of the ill-fated Crane Group purchase completed in 2011. This followed on from the February 7th announcement of a further $180m impairment associated with the International Convention Centre.

Of much more significance, however, they also offered guidance for FY24 that was well below the figures estimated by market analysts. Like others, NZSA has questioned why this was not disclosed to the market earlier – either the company’s internal processes are not feeding information through to the Board, or the Board had reason to believe that full-year guidance was not at risk.

Either scenario is startling for shareholders – and both scenarios certainly startled the professional investment analysts who gathered later that morning as part of the FBU analysts call following the announcement. One line of questioning reflected NZSA’s concerns, highlighted the “communication lines” within the business and how information was being channelled to the CEO and Board.

An analyst also asked whether the remainder of the Australian business would be placed under “strategic review” (similar to Tradelink). The answer was a clear and definite ‘no’ from the CEO. NZSA had previously floated a ‘structural breakup’ to the company, on the basis that the complexity of the business was a factor in the continual surprises for the Board. We were assured at the time that there was strong integration value between the assets, and they were worth more together than apart.

The share price then was $4.60. Today, it is $3.42.

We feel that the board should at least consider a structural breakup of the Group as an option to benchmark value for shareholders. To be clear, we’re not advocating for a breakup at this point – we simply want the analysis to be done.

The company also announced the retirement of CEO, Ross Taylor, and the resignation of Chair, Bruce Hassall. As highlighted in our commentary last week, we would expect that Hassall’s resignation is only the beginning of Board change at the beleaguered company – not the end. We remain unconvinced that the current Board composition is suited for the complexities of the company. If the current Board were to ask “who could have done better” – I think most shareholders would be ready to call that bluff.

Two factors stood out in the announced changes: firstly, that both leaders talked about “taking accountability” for the ongoing provisions, impairment and poor performance. Accountability is one thing – but in my perfect world, both could have acknowledged and set out a plan to resolve any underlying issues at FBU, including the communication of (un-acknowledged) real-world financial risks that an exasperated team of front-line Fletcher employees are likely to be seeing unfold in front of them.

Second, Ross Taylor’s smile seemed to broaden on the TV One news when talking about his retirement. He might be the fall guy, but it is unlikely that his departure alone will be the silver bullet sought by shareholders.

NZSA continues to call for a transparent, independent review of the skills required to govern FBU and how that relates to the current Board. Otherwise, there is some probability of the decade of disaster for FBU shareholders extending its infamous run for an even longer timeframe.

FBU has a strong history in New Zealand, in a host of industries including building product manufacture, retail, concrete, construction and many more.

It deserves better.

Oliver Mander

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