Leighton covers its indecent disclosure

Leighton's latest trading halt, combined with Stockland's downwardly revised guidance, may signal the start of a 'disclose early and disclose all' approach from companies.

Uh oh. Just over a week since Leighton Holdings was slapped with $300,000 of penalties and an enforceable undertaking by the Australian Securities and Investment Commission for breaches of the continuous disclosure regime the company has put itself into a trading halt.

Those penalties related to the group’s tardiness last year in disclosing significant downgrades to its earnings outlook relating primarily to two of its big public-private partnerships, the $4 billion Airport Link project in Brisbane and the equally troubled $3.5 billion Victorian desalination plant.

Leighton requested today’s trading halt pending a review of information emerging from its quarterly reviews of its major projects, including the financial performance of the Airport Link project, and the impact, if any, of that information on the earnings guidance the group provided to the market on February 13. That guidance was for an after-tax underlying profit of between $600 million and $650 million.

The specific reference to the Airport Link project is disconcerting, given that only last month Leighton said the project was 92 per cent complete and, in an KGB interview, chief executive Hamish Tyrwhitt said that once a ‘job’ was 93 per cent to 95 per cent complete "even if there’s a five per cent or ten per cent blow-out it’s not a material impact".

While it is conceivable and indeed likely that, after its encounter with ASIC, Leighton is being ultra-cautious about its disclosures, today’s trading halt does suggest that there has been another material deterioration in the performance of the Airport Link project, one of a trio of exposures that caused the group to write off almost $1 billion last year.

Apart from the forward-looking enforceable undertaking in relation to its continuous disclosure obligations Tyrwhitt has made it clear that he will beef up the quality of the risk management processes at the project level to try to avoid similar shocks and losses in future.

The projects he inherited, however, despite being virtually complete, appear to be continuing to create problems for the group and are over-shadowing his attempts to give Leighton a fresh start that restores its reputation for risk-management.

There may have been another illustration today of the increased sensitivity of listed entities to the continuous disclosure regime in the wake of the Leighton penalties and ASIC’s warning to all listed companies that it was adopting a more aggressive approach to enforcing the regime.

Stockland Group revised downward its guidance for this financial year – guidance it provided only last month – citing a ‘recent’ deterioration in the residential market that had impacted it sales and prolonged wet weather that had caused a deferral of a number of settlements into next financial year. It said the residential market had deteriorated since banks lifted their mortgage rates independently of the Reserve Bank and March sales had been lower than expected. The new guidance assumed sales would continue to be slow for the rest of the year.

The revision is for only 3.5 per cent lower-than-previously-forecast for earnings per security, from 31.6 cents to 30.5 cents, or about $25 million. In the past that might not have been considered material or mature information, particularly as the residential property market can be moderately volatile. The old rule of thumb for a disclosable change in guidance used to be closer to 15 per cent than five per cent.

With ASIC on the warpath, however, it makes sense for companies to adopt a ’disclose early and disclose all’ approach to any change in their circumstances.

The market, and the authorities, will take note of Matthew Quinn’s commentary on the reasons for the revised and sombre outlook. Quinn said national dwelling approvals were running well below historical trend and that Stockland expected the residential market "to find a floor" in the next six to 12 months. The recovery was, however, likely to be slow unless there was a reduction in bank interest rates to improve affordability and consumer confidence.

There is no doubt that last month’s decision by the banks to make out-of-sync rate rises did damage already-fragile consumer confidence and that it has had an impact on an already soft housing market.

While funding costs do appear to be receding from their high-water marks as the immediate threat of a eurozone meltdown has diminished, at least for a while, there isn’t any sense that the major banks are about to cut their home loan rates any time soon and the Reserve Bank appears reasonably comfortable that its rate settings are appropriate for the environment.

That isn’t good news for the property sector, or the industries – and state treasuries – that depend on it.

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