Fletcher Building Ltd (ASX: FBU) shares are in the red on Friday as the market digests reports legal issues may be mounting for the company.
Shares are down nearly 8% to $2.76 apiece at the time of writing.
The New Zealand-based construction giant faces potential legal action related to alleged defects in its subsidiary's plumbing products.
Investors are clearly rattled, sending the stock lower today. Let's see what happened.
Legal woes from BGC
The sell-off in Fletcher Building shares was triggered by an announcement made after the market close on Thursday.
Yesterday, media reports circulated indicating that Western Australian builder Buckeridge Group of Companies (BGC) plans to file legal proceedings against Fletcher's subsidiary, Iplex Pipelines Australia.
Fletcher confirmed in its update it was aware of the media reports citing the claims. The release was marked price-sensitive, so it is taking the matter seriously.
According to reporting by Reuters, the issue revolves around alleged defects in Iplex Pro-Fit Pipes. These were used in numerous homes built in Perth.
These failures reportedly occurred in nearly 1,500 homes constructed between mid-2017 and mid-2022.
BGC built approximately 90% of the affected homes. It's not yet clear the long-term impact this could have on Fletcher Building shares.
Fletcher has previously dismissed claims relating to this issue back in October 2023. It said BCG's repaid estimate was "misleading & sensationalist", despite acknowledging the plumbing failures.
It said it was "undertaking to support industry and homeowners in finding the right solution".
In its statement posted today, Fletcher said it hadn't received any notices:
[Fletcher Building] acknowledges that it is aware of media reports that Western Australian home builder, BGC, intends to file legal proceedings against its subsidiary, Iplex Pipelines Australia (Iplex AU), in relation to the Iplex Pro-Fit Pipes issues.
Iplex AU has received notification of BGC's intent but has not yet been served with formal proceedings.
Impact on Fletcher Building shares
The potential legal battle isn't the only factor weighing on Fletcher Building shares. The company's stock has been heavily sold this week, down 10.5% since Monday.
It reported its FY24 results yesterday, showing flat revenue and a 35% decrease in pre-tax income, resulting in a net loss of $227 million.
The board did not declare a dividend.
Over on the New Zealand market, Brokers Macquarie and Morgan Stanley cut their price targets on the stock by 5% and 6% to $2.43 and $2.90 per share respectively.
Zooming out, the stock is down more than 36% this year to date. Renowned technical analyst David Linton has repeatedly said "Bad news happens in downtrends, Get used to it!".
Could this be Linton's theory playing out here?
Foolish takeaway
Fletcher Building shares are under pressure as the company prepares to face potential legal action.
But the shares have been under pressure for quite some time now. Over the last 12 months, the stock is down 36%.
