Fletcher Building is lowering its expected forecast operating earnings before interest, tax and significant items for the financial year ended 30 June 2017 to $525 million, down from previous guidance of $610-$650 million.
The listed company also told the NZX today that there is also a possible impairment of up to $220 million relating to Iplex Australia and Tradelink business units.
In total, the lower earnings guidance plus the impairments represent a $450 million setback for Fletcher Building.
Trading in the building products, international, distribution and residential and land development divisions, as well as three of the four business units in the construction sector, are in line with the company’s expectations.
However, as work on the main projects in the Building + Interiors (‘B+I’) business unit has progressed, it has become apparent that losses in B+I will exceed those previously estimated.
The deterioration is due to a major project subject to previous write-downs, which has required an increase in project resourcing and therefore cost as it nears completion, as well as a second major project where construction timelines and the likely end date have extended.
There are also reduced profit expectations on some smaller projects in the remainder of the B+I portfolio.
“It is very disappointing to see further losses being reported in the B+I business, particularly when the vast majority of the remaining Fletcher Building business units have performed so well during the year,” says Fletcher Building chairperson Sir Ralph Norris.
“I know our people in B+I are working incredibly hard to deliver some projects for our clients and I would like to acknowledge their efforts,” says Norris.
Also, consistent with standard practice at the end of each financial period, Fletcher Building has undertaken a review of the Balance Sheet carrying values of its business units.
This report has indicated that the value of two business units, Iplex Australia and Tradelink, are likely to be subject to an impairment charge of approximately $220 million when the company finalises its financial statements in August.
An impairment of this nature would be reported below the EBIT line and have no impact on cash earnings.
An impairment charge of $220 million would represent approximately 3% of the group’s total assets as at 30 June 2017. The amount of asset impairment is indicative at this stage and is subject to finalisation of the year-end audit.
“With regards to the impairment of Iplex Australia and Tradelink, while we do see progress in these business units the Board felt it was prudent to recognise that the near to medium term estimates of profitability in each business is not aligned with current carrying values,” says Norris.
