Forsyth Barr analysts say Fletcher Building has now made $420 million worth of provisions on the convention centre project in the past 12 months and the latest ones 'bring into question management controls and board oversight'

News from construction giant Fletcher Building (FBU) that it's making a further $165 million worth of provisions for work on Auckland's NZ international Convention Centre (NZICC) is "particularly disappointing", according to analysts with investment services firm Forsyth Barr.

In a research report headed: 'NZICC Steels More Cash', Forsyth Barr analysts Rohan Koreman-Smit and Paul Koraua say the provisions are particularly disappointing "given it has been just six months since the last one and continues to bring into question management controls and board oversight".

"This takes [Fletcher Building's] total NZICC-related provisions to $420 million over the last 12 months," the analysts say.

They say the ultimate cash cost will see Fletcher Building's debt to equity levels reach "the top end" of the company's target range "and we expect a reduction in dividends and cuts to the growth capex pipeline" at the company's upcoming half-year result announcement on February 14 in order to "provide some headroom".

"While covenants are likely not at risk we still expect FBU to take action on its balance sheet and expect a reduction in near-term distributions and/or growth capex with the 1H24 result."

The analysts say they are retaining their 'outperform' rating for the company on valuation grounds, with Fletcher Building shares "trading at a discount to its own history and peers, but acknowledge to re-rate the stock the market will likely want more certainty" around NZICC completion costs and also the 'Pro-fit' pipe issues in Australia.

The analysts say their underlying earnings forecasts are unchanged but they have reduced their full-year 2024 and 2025 dividends per share by 26%.

Additionally, they have lowered their 12 month 'target price' for the Fletcher Building stock by 20c to NZ$5.30 "due to additional legacy project cash costs".

Fletcher Building shares are down over 23.5% in the past 12 months, most recently trading at $4.17.

Koreman-Smit and Koraua question whether the market should have known about the latest provisions earlier.

"The flow and quality of internal information, as well as management controls and oversight, remain in question given a number of these issues should have been recognised earlier (i.e. lower than expected remediation productivity, sub-contractor availability and solvency, degradation of stored materials etc.)."

The analysts are forecasting that Fletcher Building will have made an 'underlying' after-tax profit of $138 million for the first six months of the financial year to June 30, 2024, down 32% on the same period a year ago.