Building confidence softens
This will be a dampener on participants such as Lend Lease and Leighton Holdings, among others, in listed and unlisted investments.
In its first-quarter update on Monday, Leighton Holdings said it returned to an after-tax profit of $123 million, compared with an $80 million loss in the previous corresponding period - (this included profit writebacks on Airport Link and Victorian Desalination Plant).
But the one area of weakness was the drop in work in hand (WIH), down from $43.5 billion at December 31, 2012, to $42.2 billion as of March 31, 2013.
Management said there had been a "softening in the overall level of contract awards in construction and contract mining". The managers also said Leighton aimed to improve the closing margins on new work through bid discipline and cost cuts.
Analysts at JP Morgan said with the Australian engineering construction peak likely to occur this year they believed competitive pressures would build on margins.
Concern about margin pressure comes as the national construction sector hit a seven-month low in April with poorer industry conditions.
The latest Australian Industry Group/Housing Industry Association Australian Performance of Construction Index was down 3.8 points at 35.2 in the month (readings below 50 indicate a contraction in the industry, with the distance from 50 indicative of the strength of the decline).
The report said construction activity was weaker in April at 34.7 and employment fell 9.4 points to 29.8, the weakest reading in the 7½ years since the survey began. New orders (37.7) and deliveries from suppliers (40.4) were also lower. None of the four main construction sub-sectors expanded in the month.
Director of public policy at the Australian Industry Group, Peter Burn, said the decline in April was a setback to an industry already under intense pressure.
Frequently Asked Questions about this Article…
The article says the construction and development sector is under pressure as it recovers from a recent slump. Experts expect the sector to face headwinds for the coming year, with a softening in contract awards and weaker industry conditions noted in April.
Leighton Holdings returned to an after-tax profit of $123 million in the first-quarter update, compared with an $80 million loss in the previous corresponding period (the result included profit writebacks on Airport Link and the Victorian Desalination Plant). However, work in hand fell from $43.5 billion at December 31, 2012 to $42.2 billion at March 31, 2013.
"Work in hand" (WIH) is the value of contracts a construction company has on its books. A decline in WIH, like Leighton's fall from $43.5bn to $42.2bn, can signal a reduced revenue pipeline and fewer upcoming projects, which is important for investors tracking future earnings potential.
Yes. The article highlights concern about margin pressure: Leighton management flagged softening contract awards and JP Morgan analysts warned that, with the engineering construction peak likely this year, competitive pressures are expected to build on margins.
A reading of 35.2 on the Australian Industry Group/Housing Industry Association Performance of Construction Index indicates a clear contraction (readings below 50 show contraction). The index fell 3.8 points in April, reflecting weaker activity, lower new orders and supplier deliveries.
In April the index showed construction activity at 34.7, employment fell 9.4 points to 29.8 (the weakest reading in about 7½ years), new orders were at 37.7 and supplier deliveries at 40.4. None of the four main construction sub-sectors expanded that month.
The article says the sector weakness will be a dampener on participants such as Lend Lease and Leighton in both listed and unlisted investments. Fewer contract awards, lower work in hand and margin pressure could weigh on revenues and returns for investors in these companies.
According to Leighton management, the company aims to improve closing margins on new work through tighter bid discipline and cost cuts. These are the types of measures companies are using to try to protect margins amid tougher competitive conditions.
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