February 7, 2018 / 8:43 PM / 3 months ago

UPDATE 2-Fletcher flounders in NZ construction boom as losses mount

* Fourth earnings downgrade in 11 months

* Company expects to break loan covenants

* Shares halted pending further announcement on Monday (Recasts; adds analyst and industry quotes)

By Tom Westbrook

SYDNEY, Feb 8 (Reuters) - The biggest company in New Zealand’s booming construction sector on Thursday flagged its fourth earnings downgrade in less than a year, as soaring labour costs pushed its major projects to losses deep enough for the company to breach loan covenants.

Even as the industry’s rapid growth lifted the kiwi economy to its 19th consecutive quarter of expansion in December, losses mounted more than expected at Fletcher Building Ltd’s construction division, the company said.

The builder and New Zealand’s second-largest company by revenue said it would breach “one or more” of its debt covenants, and that losses in its building unit would be bigger than its previous forecast of NZ$160 million ($115 million).

The covenant breaches are likely to force loan renegotiations and raise Fletcher’s borrowing costs at a delicate time for the company, where construction last year comprised about quarter of its revenue.

Fletcher replaced its chief executive last year and faces further labour market tightness as a new government-funded home building program rolls out.

Fletcher gave few details of the latest cost overruns, and did not quantify its new loss expectations. It said the results of a review of its troublesome projects would be published on Monday.

The company’s string of earnings downgrades come despite record migration driving the biggest building boom in living memory in New Zealand. Cost blowouts have been blamed on a fast-moving labour market that can turn once-profitable contracts into liabilities as wage bills balloon.

“People are just getting paid some silly money at the moment” as builders bid wages higher and higher to lure the workers they need, said Kevin Everett, Managing Director of Auckland-based agency Building Recruitment.

Bricklayers, carpenters, plumbers, electricians and even unskilled “hammer hands” can command top dollar, with qualified builders’ hourly rates jumping as high as NZ$50 to NZ$60, he said.

Industry-wide costs for non-residential construction rose by half between 2015 and 2017, according to project management firm Rider Levett Bucknall.

HAMMERED

Fletcher, which has two major projects under construction in Auckland and Christchurch, previously warned of cost overruns in March, July, and October 2017. Each time, the blowouts went beyond expectations, shaking investors’ confidence in company forecasts and management.

Shares in the company have lost a quarter of their value in 12 months, and Fletcher is one of the worst-performing stocks on the New Zealand index. Fletcher shares were in a trading halt on Thursday pending the Monday review.

“I think the company had a view that they’d drawn a line under this last year, but clearly not,” said Andy Bowley, head of research at investment firm Forsyth Barr.

Fletcher has NZ$725 million in borrowings due to be repaid between 2020 and 2022, according to Thomson Reuters Loan Connector data. The company gave no further details about its debts on Thursday.

It is due to report half-year results on Feb. 21. ($1 = 1.3839 New Zealand dollars)

Reporting by Tom WestbrookAdditional reporting by Chandini MonnappaEditing by Alexander Smith and Christopher Cushing

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