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Leighton Holdings

By Dan Stratful

Friday 30th March 2012

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Leighton Holding’s (ASX: LEI) shares were hammered this week after the contractor entered a trading halt, and then resumed trading, after revealing further problems with 2 of its Australian projects – the Airport Link Road Project (APL) in Queensland and the Victorian Desalination Plant (VDP).

Contracting can be a tough business, as unforeseen cost blow-outs and cost over-runs periodically crop up, catching investors unaware, as the company books a non-cash write-down due to a mis-priced contract.

LEI is not the first company to experience problems with projects. Transfield Services and Downer EDI also had problems with projects and Downer took write-down’s of over $500 million on its Waratah Train project.

LEI reports that the APL project has been hit by higher than expected commissioning costs, which are now forecast to be more costly than anticipated, while forecast productivity on the site is not being achieved. The VDP project has been hit by construction slippage and flooding of the in/out-take tunnels which have proven to be more difficult than LEI expected.

Both these events mean LEI has reduced its underlying net profit guidance for the first half ending 30 June 2012 to in a range of between $100-$150 million. Full year underlying net profit for the year ending 31 December 2012 (FY12) is expected to come in at between $400-$450 million.

Analysts’ in Australia note that the latest problems have hurt the company’s credibility and shareholder confidence, and several brokers have downgraded the stock to Underperform.

LEI remains a significant international player with around $44.5 billion of work in hand, but the execution of some of its projects has recently been disappointing. Given its overall financial position, LEI currently has no need to raise capital.

About Leighton Holdings:
LEI is one of the world’s leading international contractors, and the world’s largest contract miner operating through a number of companies including - Leighton Contractors, Thiess, John Holland, Habtoor Leighton Group, Leighton Africa, Leighton Asia, Leighton Welspun India, Leighton Offshore and Leighton Properties. Overall it provides development, construction, contract mining, and operation and maintenance services to the infrastructure, resources and property markets throughout more than 20 countries.

Status: AVOID

LEI’s shares today traded at $21.80

For portfolio, sharemarket and fixed income enquires contact:
Dan Stratful at Investment Research Group (IRG)
Authorised Financial Adviser (AFA)
0800 437 8489, 09 304 0232, dan.stratful@irg.co.nz
**A disclosure statement is available, on request and free of charge.


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DISCLAIMER: To the extent that any of the content above constitutes advice, it is general advice that has been prepared without reference to investor’s objectives, financial situation or needs. Before acting on any advice, investors should consider the appropriateness of the advice and IRG recommend that investors should obtain appropriate financial, legal and taxation advice before making any financial investment decision. The report is based on information compiled from public information and private research. IRG have completed the report on a best endeavours basis and do not accept any liability of loss or damage. IRG suggest that clients use this as part of a decision making process and check key data before making any investment decisions.
Employees may have an interest in the securities discussed in this report.



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