INSIGHTS

INVESTING IN BUILDING FIRMS CAN BE TOUGH GRAFT

Mark Lister, 28 March 2017

Shares in Fletcher Building have taken a right pounding over the last several weeks, putting it firmly at the bottom of the heap for S&P/NZX 50 performers in 2017, among the larger companies at least.

The almost 25 per cent decline is in stark contrast to last year, when the company was one of the top performers with a 52 per cent gain.

Construction is a tough game, and for investors the sector has provided returns that are mixed at best.

Since it came into being in about 2001, Fletcher has been a good performer, although much of that is due to strong gains in those early years.

Over the past decade it’s been much less impressive, lagging behind the broader market while many other large NZX-listed companies have gone from strength to strength.

To be honest, the whole industry looks hard work to me. Fixed-price contracts seem common, and these very quickly become regrettable given the cost overruns and delays that seem to happen relatively regularly. Competition is high and margins are often skinny, especially for the larger government projects where public money is being spent.

Volatility and risk seem par for the course, making it a great sector to invest in while the going is good, but a dangerous one when times are tough. As Fletcher has shown us recently, even when economic conditions are seemingly in your favour, it can still be challenging.

I had a look at some of the biggest listed examples around the world, and seven out of 10 have been relatively poor performers, delivering below average returns and higher volatility. James Hardie in Australia was an exception, as were a couple of the bigger US companies.

There have been some very profitable periods for investors, as was the case in 2016 with Fletcher Building. However, it seems you need to be good enough to trade in and out of these companies to reap those benefits. As a long-term investment to buy and hold with the grandkids in mind, it’s questionable whether you need to be there.

Fletcher has dropped the ball, and will be getting deservingly grilled by disgruntled institutional investors demanding assurances it won’t happen again. How they’ve managed to find another $100 million-plus of contracts that’ve gone pear-shaped – barely a month after their last result – certainly raises eyebrows.

One prominent fund manager gave them a serve in the Herald recently for putting the interests of smaller investors at the back of the queue. As a representative of many private investors, I can’t disagree with his comments.

Auckland Airport, Ryman, Fisher & Paykel Healthcare and Meridian Energy are all similar sized companies, and their management teams couldn’t be more accommodating in this regard. They’ve all been far superior investments too.

The chief executive of one of those actually ran the construction division at Fletcher for many years, during what happened to be a much more prosperous period. I’m sure he, like many of us, was scratching his head last week while looking back at his former employer.

This article was published by The New Zealand Herald on 28 March 2017.