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Fletcher Building Products (FBU) provides a range of building and construction services with a large foothold in the New Zealand residential development and infrastructure sector.  Helped along by the Australian and New Zealand residential construction booms, the share price for FBU almost doubled between February and September 2016 and management continued to impress shareholders with earnings upgrades and consistent business growth.

However, in March this year a full year earnings downgrade was announced to the market, citing unexpected costs on some current projects that were eroding profit margins.  Alarm bells started ringing.  Generally when construction companies tender for projects they use assumptions to produce cost estimates, and these assumptions will normally be used for all estimates until pricing changes or historical data from completed projects calls for an amendment.  At the time we flagged that the under-estimation of construction costs would have likely extended further than just the few projects currently underway, and that there was a risk that further downgrades might be forthcoming.  Here is the footage of our Director David Manchee explaining our thesis on Sky Business News the day the company made the initial announcement.

Last week management announced that global accounting firm KPMG had been engaged to ‘conduct a review of the two largest projects in its B+I business and the two largest projects in its Infrastructure business’.  I hope for all shareholders the result of this review will determine that we were wrong, and that future projects will not suffer the same fate but all we can do now is wait and see.  Since announcing the initial downgrade, the share price for Fletcher Building has fallen 30%.

Significant market reactions to negative changes in outlook is becoming the new norm, and for our clients we have added value by taking money off the table as soon as downside risk becomes the overarching factor.  In some cases we will repurchase the same companies at a later date but once the risk returns to the upside and most times for a discount to the original sale price.  If you would like to know more about how Belvedere may add value to your investment portfolio, please add your details below and we will be in touch.

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