After a Fletcher Building update with 'few redeeming features' analysts see a risk that the company's net debt 'moves up' in the first half of the next financial year

Analysts are warning of a potential debt "pinch" for struggling construction giant Fletcher Building [FBU] in the first half of its 2025 financial year.

This follows the sharp downgrade in profit forecast for the 2024 financial year to June issued by the company earlier this week. Fletcher is currently operating without either a permanent chief executive or chairman after the previous incumbents both stood down when the half-year results were announced in February. 

Senior analyst Rohan Koreman-Smit and associate analyst Paul Koraua of investment services firm Forsyth Barr say the Fletcher update this week had "few redeeming features".

They and other analysts are pointing to the first part of of the next financial year (which will start in July 2024) as possibly a "pinch point" for Fletcher.

One of the requirements of Fletcher's debt covenants is that is keeps net debt to under 3.25-times its earnings before interest, tax, depreciation and amortisation (EBITDA).

Koreman-Smit and Koraua said that in its update Fletcher had given guidance of net debt of about $1.9 billion to $2.billion at the end of the 2024 financial year - which was about $150 million higher than market consensus expectations.

"At its 1H24 result FBU [Fletcher] had guided to net debt falling from $2 billion over 2H24, with working capital unwind, lower capex, and cut dividends more than offsetting cash outflows from legacy construction projects.

"This is now not the case, with 2H24 cash generation around zero," the analysts said.

"What's more, FBU typically builds working capital in the 1H in Fletcher Living which underpins the seasonally stronger 2H home sales. There is also further legacy project cash outflows and contracted land purchases in FY25.

"As such, the risk is that net debt moves up in 1H25. Compounding this, the FY24 exit run rates suggest 1H25 EBIT [earnings before interest and tax] of c. 210 million (assuming normal seasonality in Fletcher Living and Construction, but all else equal), which would take 12-month rolling EBIT -11% to c. $460 million. Our scenario analysis in Figure 7 suggests this combination could leave little headroom to the senior debt covenant at 1H25."

The sentiment of the Forsyth Barr analysts is mirrored by those at Macquarie Securities, who forecast "close to nil 1HFY25 senior covenant headroom" for Fletcher.

And analysts at Morgan Stanley think "there is now a greater risk of a capital raise" by Fletcher.

Fletcher actually issued a statement to NZX prior to announcing its half-year results in February denying media reports that it was "weighing up an equity raise". 

Forsyth Barr's Koreman-Smit and Koraua say they have "further delayed" their expectation of Fletcher's return to paying dividends. It is not paying dividends at the moment.

"We had previously assumed that this would occur in 2H25 after legacy construction projects complete. Given the continued high debt levels, we now assume FBU will prudently prioritise debt reduction, and we expect dividends to return in 2H26 when leverage ratios are improving."