* Ellerston began buying shares in Dec,
* Ellerston sees Fletcher as a turnaround story
* Fri report of Wesfarmers’ interest sent Fletcher stock soaring
* Fletcher hit by cost blowouts, losses (Adds fund manager comments)
By Charlotte Greenfield and Tom Westbrook
WELLINGTON/SYDNEY, April 16 (Reuters) - Australian investment firm Ellerston Capital said it has built a 5.1 percent stake in New Zealand’s Fletcher Building Ltd - a disclosure that comes amid speculation that the embattled construction firm has become a takeover target.
Shares in Fletcher surged on Friday following a report by the Sydney Morning Herald that the Wesfarmers Ltd conglomerate has acquired 3 to 4 percent of New Zealand’s biggest construction company with a view to a takeover.
Until last week, the builder had been mostly battered by investors for bungling the country’s biggest construction boom in living memory.
But as its two most troublesome loss-making projects near completion and New Zealand housing demand shows no signs of slowing down, some investors say the stock looks undervalued.
“Fletchers has a lot of good businesses and it’s just one area that’s going particularly badly,” said Brian Gaynor, head of Auckland-based Milford Asset Management, which owns Fletcher shares.
“The stock price has come down too far and there’s some value on a long term basis.”
Ellerston, which is backed by billionaire James Packer, began buying shares last December, a stock market filing shows. It made large purchases late in January, in February and in April and has published an investor newsletter that listed Fletcher as a “turnaround story”.
“In New Zealand at the moment there’s huge opportunities,” said John Tookey, professor of construction management at the Auckland University of Technology.
“Fletchers have a lot of reach in the marketplace,” he added, as demand for housing, retail commercial and infrastructure construction remains strong.
Ellerston did not respond to requests for comment on Monday. Fletcher declined to comment. Wesfarmers, which has previously declined comment on the Sydney Morning Herald report, did not immediately respond to a request for fresh comment.
A stake of more than 5 percent needs to be formally disclosed in a filing, according to New Zealand stock exchange regulations.
Fletcher slumped to a half-year loss in February, capping a year of earnings downgrades, as labour charges and materials costs on its two biggest commercial building jobs ran out of control.
The cost blowouts, even as booming construction has powered New Zealand’s economy to 20 consecutive quarters of growth - have cost its chief executive and chairman their jobs and prompted the firm to scrap its dividend for the first time in its history.
On Monday, Fletcher’s stock lost ground after initial gains to trade 1 percent lower. It gained 9 percent on Friday after the Wesfarmers report but is still down 17 percent for the year to date.
Reporting by Charlotte Greenfield in WELLINGTON and Tom Westbrook in SYDNEY; Editing by Daniel Wallis and Edwina Gibbs