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LEI; Industrials; Earnings adjustments following guidance update - JBWere 04 Aug 2011


Earnings adjustments following guidance update


Following the guidance update by Leighton today for FY11 and FY12, we have downgraded our pre-NRIs FY11 NPAT forecast for the downgrade on the Victorian Desalination Project or VDP (though we have modestly upgraded our post-NRIs FY11 NPAT forecast consistent with the updated FY11 guidance) and have upgraded our FY12 NPAT forecast by 6.1% to now be at the lower end of the reiterated FY12 guidance.


As a result of these earnings changes there has been a modest 0.6% increase in our DCF valuation to $29.51. Our target price is unchanged at $26.00.


Recommendation and view


The downgrade of VDP was a risk we had previously flagged (Cable article 14 July "Positive Signs But Still Some Risk of Further Downgrades") and it is a positive that this has now occurred. But in our view there are still risks on the stock and these include:


  • Risk of another impairment charge on Habtoor Leighton Group;
  • Risk of earnings downgrades on other projects (e.g. Gorgon); and
  • Some remaining risk of further downgrades on APL and/or VDP
With these risks remaining we continue to believe that Leighton deserves to only trade on a market multiple or slightly above. The stock is currently trading on close to a market multiple in FY12 on a PER of 12x and we really need the stock to be trading at a reasonable discount to consider upgrading to a BUY. We are therefore maintaining the HOLD recommendation and need to see the stock trading around $19 or lower to consider an upgrade.


EPS Revision:

FY11: -60.7% to -168.7c

FY12: +6.1% to 176.4c

FY13: +2.1% to 202.9c

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The trading halt is requested pending a review by Leighton of information emerging from the Quarterly Reviews and the impact, if any, such information may have on the earnings guidance set out in Leighton's ASX announcement on 13 February 2012.


For the purpose of Listing Rule 17.1, Leighton provides the following information:

(a) the trading halt is necessary for Leighton to make an announcement to the market in relation to any revisions to previous guidance having regard to information emerging out of the Quarterly Reviews which are currently in progress including, in relation to, the financial performance of the Airport Link Project;

if it's good news, it's an UPgrade

if it's bad news, it's an UPdate

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LESS than six months after fronting a hostile annual meeting in Sydney, Leighton Holdings chairman Stephen Johns will have to do the same again today, only this time the share price is lower, there have been a few more scandals, and another round of profit write-downs and disappointments. As Europe continues to burn, Leighton's major shareholder, Hochtief, is feeling more pressure and, more importantly, Hochtief's major shareholder, Spain's Grupo ACS, which has huge debts, is badly underwater on its investment in Hochtief, and indirectly Leighton, and is exposed to Spain's imploding economy. To put it into perspective, ACS' group net debt was ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’‚¡ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¬10.49 billion ($A13.6 billion) at March 31, almost three times ACS' ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’‚¡ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¬4 billion market value. If the banks put pressure on ACS to reduce debt further, it could have a profound effect on Hochtief and Leighton, including asset sales or something more radical.


While ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’‚¡ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¬5.8 billion of the debt is non-recourse financing for shareholders, ACS has been selling some assets in the past few weeks to reduce debt. This includes the sale of a 3.7 per cent stake in Iberdrola, followed a week later by the sale of its stake in infrastructure group Abertis. It has also sold down its services business unit Clece to a joint venture formed by Permira Advisers.


Against this backdrop, Leighton is still trying to restore its credibility with minority shareholders after a series of disappointments in the past six months, including another profit write-down in March. Johns tried to soften up shareholders before the AGM when he was quoted as saying Leighton should never have formed a joint venture with Al Habtoor in the Middle East and warned it had become a ''long-term problem''. While it was a commendable admission, hindsight is always easy, particularly given he was not on the board when the deal was done in 2007. Not so for his fellow directors who sanctioned the deal and continue to watch it bleed red ink.


Leighton is approaching a watershed moment. How it manages its affairs and problem projects - and potential problem projects - will determine its future and its overall structure. It won't be easy with Hochtief and ACS breathing down its neck. But it would help if it had a board with more construction and engineering experience.


The importance of this was nowhere more evidenced yesterday than by Johns' statement that the company would today unveil changes to risk management, including a ban on facilitation payments. Facilitation payments that are made to an agent are not illegal if they are small and administered properly. They are fundamental to doing business in some key overseas markets. If Leighton bans such payments holus-bolus in a knee-jerk reaction to an Australian Federal Police investigation linked to a contract in Iraq it could shoot itself in the foot.


Read more: http://www.smh.com.au/business/load-at-lei...l#ixzz1vYE1uiN6

this is a mess ... but, is there a good company underneath? Possibly, but if things were a whole lot simpler, more transparent, perhaps a collection of small independent companies competing against each other .... without the ego, the empire build, the un-necessary complications of agglomeration. And a stable share registry .

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Sometimes it's possible to substitute foresight for hindsight. Not often but occasionally.


I suggest the middle east venture is one of those times. Can't do much about the Germans & the Spanish, it's a free world and a collapse there could see a sell-off here. But they could have thought twice about putting their toes into murky waters.

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How much of an impact might yesterday's crane fire in Ultimo have on LEI's sp?

Initially, it didn't seem to have any effect; but then a union spokesman started complaining about leaking diesel...



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  • 6 months later...

Taking a long-term view (weekly chart), I see LEI at a critical s/r level.



It it's rejected here and drops back below $19, it's best avoided.

But a successful breakout would probably spark increasing buying interest.


(Listening to the recent presentations might supply additional "food for thought" for those who are fundamentally inclined.)

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