Forsyth Barr analysts say after its latest capital raising, Fletcher Building will have in the past decade raised $1.5b in capital and sold $1.8b in assets to fund $2.6b of 'significant items' and losses

Fletcher Building [FBU] is a difficult collection of building related businesses to efficiently manage in its current form, analysts with investment services firm Forsyth Barr say.

And they say that after completion of the current capital raise, over the course of the past decade Fletcher will have raised $1.5 billion in capital from shareholders and sold $1.8 billion in assets, in order to fund $2.6 billion of 'significant items' and losses. 

Fletcher went into a trading halt on NZX on Monday as it announced the capital raise, of $700 million, to pay down debt.

On Tuesday the company announced it had completed the first part of the capital raising, from institutional shareholders, and had taken in just under $600 million. The shares then resumed trading as the offer to remaining shareholders was launched. The Fletcher price spiked about 8% to just under $3 as the market reacted to news of the successful capital raising.  

In a research note on the capital raising Forsyth Barr senior analyst, equities, Rohan Koreman-Smit and analyst, NZ equities, Paul Laxton Koraua, said while the capital raise was unsurprising, given elevated gearing, volatile trading conditions, and an incoming management team, it had come sooner than they expected.

"The new CEO is a week away from beginning his tenure, and the company just told investors that it was comfortable with its balance sheet at its FY24 result in late August," they said.

"FBU did state that the operating environment remains challenging, and that it has increased its cost out target [to $180 million] as a result."

The analysts say they see value in the NZ core of the business, and the upcoming strategic review is (another) opportunity to refocus the business.

"But the investment case is clouded by continued cash flow drag from the Construction and Australia divisions."

However, NZ demand should improve as interest rates are cut.

The analysts say the capital raise allows more time for Fletcher's new management team to undertake a full strategic review and evaluation of the portfolio of businesses.

"We expect this to be completed within the first half of next calendar year."

They say "capital partnering" within the residential division - that the company had discussed doing when announcing its annual result last month - "remains an option but this is not a quick process".

The analysts say Fletcher's elevated net debt "left little margin for error" to breach amended covenant ratios, but the capital raise does alleviate balance sheet concerns.

The analysts have adjusted the Fletcher financial forecasts (see below) for the impact of the capital raise and have assumed the proceeds are applied to debt reduction. They have lowered their 12-month "target price" for Fletcher to NZ$3.10 from NZ$3.60, "reflecting dilution from the equity raise".