Will New Zealand’s largest construction firm have to write off yet more money over the troubled International Convention Centre project?
Both Fletcher Building and SkyCity’s share prices have felt the impact of the devastating fire that has raged at Auckland’s half completed convention centre for over a day now. More than 80 firefighters continue to battle the blaze which broke out on the roof just after 1pm yesterday. The cause is not yet known, but workers had been using blowtorches on bitumen to seal roof joints. All of convention centre owner SkyCity’s neighbouring facilities, including the casino and hotel, have been closed, along with several other nearby buildings.
Firefighters have sacrificed the roof of the $700m building in order to save the rest of it, and say they are now managing the fire.
Investors are clearly nervous that the damage to the much delayed and badly needed convention centre and hotel will be significant. Shares in construction firm Fletcher Building fell by as much as 16 cents, to $4.48, when the stock exchange opened this morning, while SkyCity’s shares tumbled 15 cents to $3.71. Both prices have recovered this afternoon.
The convention centre was finally due to open in the second half of next year, and has been booked to host the APEC leaders conference in November 2021. Fletcher Building expects there will now be “a material delay” in completing the centre. “Once the extent of the damage is known the company will be able to determine the impact on the project delivery timeline,” it says.
It’s a bitter blow for Fletcher Building which was forced to announce a $150m profit downgrade two years ago due to cost overruns and delays on big projects including the convention centre. “It’s very disappointing… for the team particularly, it’s quite palpable,” chief executive Ross Taylor told reporters today. Taylor has made it clear that the company needs to get into the building and assess the damage before it can make a call on the impact, Hamilton Hindin Greene investment adviser Grant Davies says.
“It’s not great, you can infer that’s fairly self-explanatory,” he says. “We’ll await more details but it’s just another setback for the company that’s trying to turn particularly that business unit around after a few missteps.”
SkyCity says it has contract works and third party liability insurances for the project. Davies says the insurance will help but it won’t cover everything. “Whether it’s a material earnings impact is the key thing from a market perspective. Clearly they’ve already had some write downs on that convention centre. Whether they need to do any more will depend on the materiality of it all.”
However, Craigs Investment Partners head of institutional research Grant Swanepoel says Fletcher’s fortunes may go either way as a result of the fire. As the project has changed and gone up in value over time there may be a risk that it’s under-insured, and it’s also not known how the insurance company will treat the fire. If it’s considered to be a ‘force majeure’, or unforeseeable event, the insurer must cover the cost of fixing it, he says.
On the other hand, someone is going to have to do the repairs. “That remedial work can probably only be done by Fletchers and would be a cost-plus type project, which would be positive. Then while they’re waiting they now have this extra crew that they can put onto other projects and speed up the closure of those.”
“So there are positives and negatives that we don’t have a view on until we actually know what the insurance contract says and how that settles,” Swanepoel says.
Harbour Asset Management portfolio manager Shane Solly says the fire will place more pressure on Fletcher Building’s business because it will mean its programme of work is running behind schedule.
The experience of recent seismic events has also shown that insurance doesn’t always cover everything, he says. “We have seen in New Zealand when there is an insurance question mark the insurers are pretty good at slowing things down.”
SkyCity has already withheld $39.5 million from Fletcher Building because of delays in completing the new hotel and convention centre. As well as the APEC summit which is expected to bring 10,000 visitors into the city, the centre is also due to host the International Federation of Library Associations and Institutions conference in August 2022.
Taylor says Fletcher Building is “resolute” it will get the $700m project finished.