Fletcher Building: Iplex Product Complaints an Overhang, but Our Fair Value Estimate Is Unchanged

We make no change to our fair value estimate of NZD 6.00 (AUD 5.50) for no-moat Fletcher Building FBU. Since reporting in August 2023, we have included the total cost for Iplex of AUD 85 million pretax including the AUD 15 million already taken as a provision in fiscal 2023, which is in a range between two potential scenarios of industry costs provided by management. While our unchanged fair value estimate includes this lump sum we haven’t forecast the timing of it, with our unchanged earnings estimates excluding the expenses relating to Iplex.

Fletcher Building has halted trading since Oct.11 in relation to Iplex Australia’s Pro-Fit plumbing product complaints. Management has provided an update ahead of resumed trading, with the halt in trading due to be lifted on Oct. 16.

The matter relates to Iplex’s polybutylene pipe Pro-Fit, which was manufactured and sold in Australia between 2017 and 2022. Iplex is owned by Fletcher Building and supplies pipes to commercial and residential plumbers in Australia. About 11% of the 17,500 houses built in Western Australia over this period have reported leaks to date, with 94% of them installed by BGC Group or two other plumbing groups. An independent report commissioned by BGC Group stated it is the fault of Fletcher Building; it said the pipe failures are the result of manufacturing issues. Contrary, Fletcher’s report states incorrect installation by BGC Group.

Management updated and provided two hypothetical scenarios on the total cost for the industry to fix existing and potential leaks. The scenarios range between AUD 50 million and AUD 100 million. Fletcher’s management is adamant this is not a product fault and released photographic evidence to the media on Oct. 13, alleging incorrect installation of the pipes in Western Australian homes.