An end to Leighton's project problems?

The steep climb in Leighton's share price is most likely a response to a lack of bad news, rather than to its modest profit upgrade.

The sharp tick-up in Leighton Holdings’ share price today may have been a response to its modest profit upgrade, but is just as likely to reflect the absence of any material new bad news emanating from the group’s two big troublesome projects.

After a horrible last year, when almost every announcement seemed to contain new losses from Leighton's two big projects – Brisbane’s Airport Link and Victoria’s desalination project – and writedowns of the group’s 45 per cent interest in the Habtoor Leighton Group joint venture in the Middle East – it would appear Leighton finally has the projects more or less under control.

Chief executive Hamish Tyrwhitt said the performance of the two projects – which were the strong background noise to the boardroom instability that claimed both his predecessors as CEO – had stabilised and the group was making good progress towards completing them.

In the scheme of Leighton, no big new losses foreshadowed from those projects, which will have cost the group almost $800 million in losses by the time they are completed, is of much greater consequence than the still-welcome $20 million upgrading of the group’s guidance for underlying profit for the December half, from $250 million to $270 million.

It suggests, having identified severe flaws in its risk management that led to a succession of writedowns and increases in expected losses, Leighton might finally have got on top of the issues at those projects, which ended long-serving CEO Wal King’s lengthy and glittering career – and 30 years of consistent profitability – on a sour note. The ousting of King’s brief successor, David Stewart, had more to do with boardroom politics than performance.

With both the projects scheduled to be operating by mid-year, the risk of further significant losses is reducing steadily and rapidly.

The group has previously said it would generate a profit of about $232 million pre-tax, and $169 million after tax, on the sale of its contract mining services business, HWE Mining, to BHP Billiton.

That profit will more than offset pre-tax writedowns of $70 million on its investment in BrisConnections and another $50 million on the Habtoor Leighton joint venture, which has cost the group close to $500 million and allowed it to report a net profit of $340 million for the half.

Tyrwhitt reconfirmed the group’s previous full-year guidance of an underlying profit (before the capital gains and offsetting impairment charges) of between $600 million and $650 million, which may also have provided some reassurance to the market.

The absence of any new significant adverse surprises will be particularly pleasing for Spain’s ACS, which is effectively Leighton’s majority shareholder after it gained control of Germany’s Hochtieff last year.

Leighton had its credit rating downgraded by Moodys last year, not because of its own finances, but because of the debt sitting above it within Hochtieff. Neither Leighton nor ACS want any more nasty shocks to emerge from the group’s sprawling construction empire.

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