Defying the doom and gloom

Shareholders in Leighton Holdings must have been pinching themselves on Monday when the construction company bucked the gloom that has descended on the mining and construction sectors and reconfirmed its earnings guidance for the full year.

Shareholders in Leighton Holdings must have been pinching themselves on Monday when the construction company bucked the gloom that has descended on the mining and construction sectors and reconfirmed its earnings guidance for the full year.

Not surprisingly, its share price closed almost 4 per cent higher on a day when the rest of the market hardly budged and peers, including UGL and Worley Parsons, continued to fall.

At the group's annual general meeting in Sydney, Leighton's new chairman, Bob Humphris, and chief executive Hamish Tyrwhitt sent out positive messages to shareholders, quelling fears that Leighton would be the next company to downgrade earnings, by outlining cost-cutting plans and pointing to opportunities in the growth region of Asia.

Cost-cutting and an emphasis on Asia makes a lot of sense given Leighton has a good footprint in the region and can cut costs through a series of initiatives, including group purchasing agreements instead of negotiating at operational company levels. To put it into perspective, Tyrwhitt said by negotiating group agreements across heavy equipment, fuel, explosives, IT and travel, it has been able to save $45 million a year. If it can recoup the hundreds of millions of dollars of net project underclaims from contract variations across its business, it could surprise on the upper end of guidance.

Nevertheless, given the downturn in Australian mining and infrastructure it was a bold move by Humphris to maintain earnings guidance. Not to put too fine a point on it, shareholders would not tolerate another disappointment given the string of problems in the past couple of years. These include profit downgrades, two project disasters, an equity issue and more lately a class action.

The reality is the bulk of Leighton's revenue is generated out of Australia and even if it can boost revenue from Asia to $5 billion, it is a far cry from Australia's massive contribution. Furthermore, Hong Kong and Indonesia are two of the few places in Asia where Leighton has consistently made money. Elsewhere has been sporadic.

Given the recent downgrade of earnings from UGL, Coffey, Calibre Group and Worley Parsons, Leighton will do well to achieve its $520 million to $600 million earnings guidance.

Against this backdrop Leighton has been dealing with a complex shareholder structure and an even more complicated set of board dynamics, which recently shrunk to seven after three directors resigned citing corporate governance issues.

To resolve this issue, Leighton said it will appoint five new directors before the end of June as part of a grand plan to unify the company and get back on track. There was a hiccup in this goal in February when a board war broke out over a dispute about the nomination of a non-executive director. It culminated in Leighton chairman Stephen Johns being told to resign by Marcelino Verdes, a long-time executive of ACS (the Spanish company which has a major shareholding in Hochtief, which in turn is Leighton's major shareholder) and now heads Hochtief and sits on the Leighton board. Johns, along with Ian Macfarlane and Wayne Osborn, stepped down, leaving Paula Dwyer and Humphris as the last independent directors standing.

The pending appointment of five new directors will be illuminating as they will need to be independent but have a workable relationship with the executive directors and the major shareholder, which at various times have had different agendas from Leighton.

Three years ago, Hochtief is understood to have made an unsolicited offer to merge with Leighton. The offer was rejected on the basis that it lacked detail and was not in Leighton shareholders' best interests. Given Hochtief recently sold its airports business for €1.5 billion, leaving its main assets a 54 per cent stake in Leighton and some operations in Europe and the US, a similar proposal might well re-emerge. Once again it will be up to the directors to determine whether it is in all shareholders' interests.

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