Thursday, August 12, 2010

Fletcher Building: All eggs in one basket make for big risk

Fletcher Building Ltd [FBU.NZX] look to me to be in dire trouble. Mark Binns, chief executive of infrastructure and construction for FBU came out yesterday and confirmed what the market had been thinking for a long time that the reliance by the company on State spending was high.

It was higher than most thought at 84% of all work on their books:

"I like (PM) John (Key) spending money and if he stops, we're in trouble because the private sector has no gas in the tank. I think it will be quite a while before it changes. The Government will be dominant for the next two to three years. For that to change and the private sector to return, we need underlying demand in retail, residential housing, offices, commercial, industrial - and demand is on the floor at the moment". Mark Binns, NZ Herald

For Fletcher shareholders this figure should set off the alarm bells because clearly relying on one client to bolster your company fortunes in a depressed building market is a recipe for future financial calamity - especially when that client is a fickle, political, unplanned cash strapped one.

I do remember CEO Johnathon Lim trying to reassure shareholders a few years ago that the company was diversified in its income streams (he meant geographically as well as the residential and commercial sector) but having this much work coming from one client isn't wise at all.

Most of the big work for FBU is nearing the end and has largely been factored into the company's books: Mangere Bridge, Newmarket Viaduct, Eden Park and Dunedin Stadium and a whole host of other major State funded projects.

This leaves a big gap for FBU for 2011 and beyond and it will probably rely again on the State to fund its books in the future.

This of course means winning some of the big contracts up for grabs in the near to medium term.

The Waterview Tunnel (see animation of project)and associated road works, building a National Conference Centre in Auckland somewhere and a large number of national roading projects.

There is favouritism in the National Government for using private business more to do state projects and there has been much talk about future building work for many possible infrastructure projects in the future.

Fletcher Building's past has been built on State funding. From big state housing building projects starting in the 1930s (isn't that ironic) through to electricity infrastructure and everything in between, the taxpayer has kept the money rolling into the company.

The trick will be to win some of these big projects and also be ready to move when the private sector gets ready to spend money on building again. This is unlikely to be for many years to come so we are back full circle where the danger lies in having all your eggs in the State basket.

It isn't wise, should be pegged back from the current 84% of all projects if possible and leaves Fletcher's vulnerable for the medium term should the State either turn off the tap or put off work due to lack of money.

Fletcher Building @ Share Investor

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