No rally after Lend Lease reassurance
Lend Lease has moved to allay investors' concerns with the issue of a formal profit guidance of between $540 million and $550 million for the full year, despite the weakness in the construction sector.
However, the move did not have the desired effect with the shares falling another 17¢ to $8.48, down from a peak of $11.25 on May 14. That is equal to $1.6 billion wiped off its market capitalisation.
One broker said an issue was that Lend Lease, while well managed, was in a sector that was highly leveraged and reactive to small shifts in the economic cycle.
"Construction is capital intensive, with long-term projects, but a small happening can shut a site down for weeks," the broker said. "This is not helped by the weaker mining sector. While Lend Lease has a small exposure to that sector, it seems to be enough to raise concern among investors."
Lend Lease broke with its tradition of never making profit forecasts in reaction to the 7.5 per cent sell-down over the past two days, when chief executive Steve McCann warned that the construction sector was under pressure.
In a market update on Monday, Mr McCann said the "underlying construction markets in Australia, Europe, the Middle East and Africa have softened in the second half of the current 2013 year, contributing to reduced earnings from the construction businesses in those regions".
The construction sector is Lend Lease's single biggest division, contributing about 42 per cent of the overall group earnings.
But in a move to clarify the position, Mr McCann said Lend Lease "confirms it is on track to deliver a solid result in line with market expectations for 2013 financial year". This is in line with the "published Bloomberg median of $547 million".
For the year to June 30, 2012, net profit was $501 million.
Most brokers have maintained a buy recommendation on Lend Lease, but that's based on forecast improvement in the 2014 financial year.
The warning for the construction business came as Mr McCann unveiled a broad-brush restructure of the business to consolidate the Abigroup, Baulderstone, Project Management & Construction and Infrastructure Services businesses.
These were acquired in the Valemus takeover in 2011 from German constructor Bilfinger Berger for $960 million.
Analysts at CIMB said Lend Lease's market update reflected a composition change to its 2013 full-year net profit expectations rather than a change in the numeric outcome. "Prima facie, this is a deterioration in the operation of the business this year, but in our view it also highlights the likely drivers for the business and share-price performance through 2015-16 financial years, in particular," they said.
"We have made no change to our recommendation, although we see likely outperformance in the latter part of the 12-month period rather than the earlier part - not because Lend Lease isn't undervalued, but because we don't believe the likely catalysts to move the market will happen until mid to late 2014 financial year."
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