Better profit, earnings suggest recovery for Leighton

LEIGHTON Holdings has shown the first tangible signs of putting its bad year behind it after flagging stronger profits for the half-year, thanks to an improvement in earnings from its Australian and Asian operations.

By InvestSMART · 17 Jan 2012

By InvestSMART ·
17 Jan 2012

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The profit upgrade gave investors some relief yesterday after a year in which Leighton endured board and management upheaval, profit downgrades, cost blowouts on projects such as Victoria's desalination plant and a fall of more than a third in its share price.

Shares in the construction giant surged more than 4 per cent to $21.44 yesterday, after it lifted guidance for underlying profit after tax by $20 million to $270 million for the six months to December 31.

Leighton has made further write-downs of $49 million after tax on its investment in BrisConnections, which is building Brisbane's Airport Link roadway, and $50 million on its joint venture in the Middle East.

The latest guidance equates to an after-tax

profit of $340 million for

the "transitional" half-year.

It is changing its reporting calendar to align it with German parent Hochtief, which in turn is controlled by Spanish giant Grupo ACS. Leighton's financial year will now end on December 31, rather than the end of June.

Leighton chief executive Hamish Tyrwhitt said the construction of the problem-plagued desalination plant and Airport Link projects had "stabilised". "We are making good progress in bringing them to completion," he said yesterday.

The forecast for a net profit of $340 million for the half includes a pre-tax capital gain of $232 million from the sale of the HWE Mining iron ore business to BHP Billiton last year.

Leighton expects to open the Airport Link to traffic in June, while the desalination plant should be pumping out water by July. The company has previously booked total write-downs of more than $750 million on the desalination plant, which its subsidiary, Thiess, is building as part of a joint venture with Degremont.

Leighton also maintained yesterday its guidance for the full year of between $600 million and $650 million in underlying profit after tax. That forecast excludes the HWE sale and the latest write-downs.

Nomura analyst Simon Thackray said it was good to see Leighton taking the opportunity to deal with issues that had beset it over the past year.

"It has cost shareholders a lot of money in the last 12 months in having to deal with these problems, but they are showing that these major projects are under control," he said. "People will take more comfort in the outlook and the risk."

Mr Thackray said he expected Leighton's cash position to be reasonably strong this year, which would allay concerns that the company would need another capital raising.

"In essence what we are lining up for in calendar year 2012 is a cleaner year where at least our known surprises have been largely dealt with."

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Frequently Asked Questions about this Article…

What caused Leighton Holdings' tough year and what signs of recovery are reported?

Leighton faced board and management upheaval, profit downgrades, and major cost blowouts on projects such as Victoria's desalination plant, which contributed to a share-price fall of more than a third. The company has flagged stronger profits from its Australian and Asian operations, lifted guidance for underlying profit after tax for the half-year, and said major problem projects have “stabilised,” suggesting the first tangible signs of recovery.

What is Leighton’s latest profit guidance for the half-year and what does it include?

Leighton lifted its guidance for underlying profit after tax by $20 million to $270 million for the six months to December 31. The company also forecast a net profit of $340 million for the transitional half-year, which includes a pre-tax capital gain of $232 million from the sale of the HWE Mining iron ore business to BHP Billiton.

How did the market react to Leighton's profit upgrade?

Shares in Leighton surged more than 4 percent to $21.44 after the company announced the profit upgrade and the improved outlook for its Australian and Asian operations.

What recent write-downs has Leighton recorded and which projects are affected?

Leighton made further after-tax write-downs of $49 million on its investment in BrisConnections (the Airport Link project) and $50 million on a joint venture in the Middle East. The company has previously booked total write-downs of more than $750 million related to the desalination plant project.

What is the current status and expected timing for the Airport Link and the desalination plant?

Leighton expects to open the Airport Link to traffic in June, and the desalination plant should be pumping out water by July. Leighton’s chief executive said construction on these problem-plagued projects has “stabilised” and the company is making good progress toward completion.

Why is Leighton changing its financial year and what are the implications?

Leighton is changing its reporting calendar so its financial year ends on December 31 instead of June 30 to align with its German parent Hochtief, which is controlled by Spanish group Grupo ACS. The change aligns reporting timetables with its parent company.

What do analysts say about Leighton's outlook and cash position?

Nomura analyst Simon Thackray said it is positive to see Leighton addressing past problems, and he expects the company’s cash position to be reasonably strong this year—reducing the likelihood of another capital raising. He suggested calendar 2012 could be a 'cleaner year' with many known surprises dealt with.

What should everyday investors watch next for Leighton Holdings?

Investors should monitor Leighton’s completion progress for the Airport Link (opening in June) and the desalination plant (due to pump water by July), any further project write-downs, updates to full-year underlying profit guidance (currently $600–$650 million excluding the HWE sale and latest write-downs), and announcements about the company’s cash position and capital strategy.