Market Gives Leighton A Knock

By Glenn Dyer | More Articles by Glenn Dyer

So what happened at Leighton Holdings yesterday? A great result, beating guidance and the market gives it the thumbs down.

Well the shares sank by more than $2.30, to a low of $40.27 yesterday, in the wake of the profit report. They opened at a high of $42.90, and then sank. They eventually closed off $2.00 at $40.65.

Of course with Leighton the tight float doesn't help. Only 46% of the company's shares are available: the other 54% is held by German builder, Hochtief. So share price movements can be extreme.

The shares peaked at just over $44 on July 18, fell to a recent low of around $37 nine or so days later, and then rebuilt, with a sharp run up over the past couple of days.

Only to plunge yesterday.

Now the overall market was twitchy, but the fall at one stage was a smidge under 5%. The overall market was off a lot less than that.

Leighton did nothing wrong: earnings rose 63% in the 12 months to June to a record $450 million and indicated the outlook remained strong in all major markets.

CEO Wal King is being retained until 2010 on a lucrative new contract that could net him more than $12 million a year, according to some estimates.

Perhaps it was the forecast of ONLY a 20% rise in earnings for the coming year that clipped the price, forcing some serious profit-taking. The market has become greedy after the 63% rise in earnings in 2007.

The shares had been over-bought in the past week.

The 2007 profit compares to just $276.1 million in 2006.

Final dividend was to 65 cents a share (franked to 50%), bringing the total full-year ordinary dividend to $1.10 per share, up 67% from 2006's 66c a share.

The higher dividend was well-covered by earnings per share which jumped 62% to $1.62 a share, well covering the sharply higher dividend.

Revenue increased 19% to $11.9 billion from $10 billion in the previous year: $4.9 billion came from engineering and infrastructure (up 16%); mining and resources generated $3.4 billion (a rise of 30% on 2006), services increased 39% to $1.9 billion but building and property revenue dropped 7% to $1.7 billion. Revenue from joint ventures increased by 24% to $1.9 billion.

CEO, Mr Wal King, said "Sustained investment in new mines and resources-related infrastructure is providing a significant level of construction and process engineering opportunities for the Group, which in turn will lead to new supply.

"Export volumes should therefore be much stronger supporting the long term outlook for contract mining, particularly of iron ore and coal."

Mr King said that "Work in hand has increased to a record $21.1bn compared with $16.0bn last year, boosted by the award of a number of major new projects and some significant contract mining extensions.

"Major new projects include the $2bn North South Bypass Tunnel joint venture (JV) and $1.4bn Gateway Upgrade JV, both in Brisbane, the $1 billion Gold Coast Desalination Project alliance in Qld, the $522m Perth-Bunbury Highway alliance in WA, $790m of mining work at Prominent Hill in SA and a JV management contract for the US$2.1bn City of Dreams gaming and entertainment resort in Macau.

"In the six weeks since 30 June, approximately $3bn worth of work has been awarded including the $1bn Sydney Desalination Plant, a $300m sewerage project in Melbourne, a $500m coal mining contract at Sonoma in Qld and a $345m extension at the South Walker Creek coal mine, also in Qld," said Mr King.

"The outlook for the Group remains very strong for all major markets, which are continuing to provide a good level of opportunities in construction, mining and services. These opportunities will continue to support work in hand which should be able to be maintained around $20bn over the next year.

"After decades of underinvestment in roads, rail, water, electricity and telecommunications, a sustained catch-up spend is occurring and this is reflected in the current spending on engineering projects. Major infrastructure projects likely to come to the market or be awarded over the next year include the $3bn Airport Link toll-road and $2.3bn Goodna Bypass in Brisbane; and desalination plants worth more than a $1bn each in WA and Vic.

"Asia is forecast to continue growing strongly and the Group is leveraged both directly – undertaking mining and construction work across the region – and indirectly – providing services such as contract mining to companies selling commodities into Asia. Indonesia will be maintained by a good level of resources-related work and Hong Kong/Macau's activity levels should be supported by existing building and infrastructure work," said Mr King.

"India offers a number of exciting prospects and there are good opportunities in toll roads, airports, oil and gas, building, and in the longer term contract mining.

"The Gulf is a region of vast opportunity. Leighton International has been named as preferred tenderer to construct a US$550m highway on Saadiyat Island, where some US$27bn will be spent creating Abu Dhabi's flagship development. This project, and existing work in Qatar and Dubai, will support activity levels and provide a base to pursue other opportunities.

"The balance sheet remains very strong with total assets of $4.7bn and net cash of $669m. This strength will continue to be used to pursue growth opportunities including acquisitions to further diversify the business.

"The Group's work in hand provides great momentum and revenue for the full year is forecast to be approximately $13.5bn. This momentum means that we expect our 2008 profit to be up by at least 20% on this year's record result of $450m."

All in all pretty impressive, and in fact LEI actually beat the update forecast issued in May of a 55% rise in net earnings, while work on hand was more than t


About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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