Leighton Holdings - Q2 2013
Leighton was established in 1949. It began life as a small, privately owned civil engineering company before diversifying over the years into a fully integrated infrastructure solutions provider, across construction, mining and services. It is able to handle project development and contracting services and has operations in 20 different countries across the Asia Pacific and Middle East regions. Leighton Holdings' subsidiaries include John Holland and Theiss. The company is 55% majority owned by German construction major Hochtief.
Leighton Holdings is facing trouble from every angle, with little respite expected. The company's exposure to high-growth international markets is being eroded by an exceptionally strong Australian dollar; domestic projects have been hit by delays and its Middle East operations are still awaiting payment. Despite a strong fundamental strategy, these issues are weighing on both the company's share price and its profit outlook.
Declining Work In Hand: Leighton's work in hand, an indicator of future earnings, has continued to decline slightly - from AUD45.6bn (US$48.8bn) at the end of December 2010 to AUD44.6bn (US$47.8bn) in December 2011 - and this inhibits the potential for revenue growth for the company in 2012. Over the past six months, the company did not win any major projects in several key overseas markets such as the Middle East, India and Mongolia, while Indonesia's work in hand did not improve because of new contracts, but rather due to the resumption of mining works previously affected by extreme bad weather. Leighton also did not win sufficient projects in Australia to maintain its order backlog, with work in hand from Australia declining by 9.6% y-o-y.
Australian Dollar Remains Elevated: As of December 2011, about 35% of Leighton's work in hand was derived from overseas markets and these projects stand to benefit should the Australian dollar depreciate. This has not taken place. The Australian dollar remains elevated at US$1.0773/AUD and continues to erode earnings from Leighton's overseas ventures. While we still expect the Australian currency to depreciate over the course of 2012 due to an ever-weakening Chinese economy, its persistence at an elevated level suggests that this depreciation could take place at a latter-than expected date.
Middle East Venture Not Panning Out: Leighton's Middle East JV, Al Habtoor Leighton (HGL), is still unable to sustain itself, requiring funds from the parent company to stay afloat. The JV suffered a loss of AUD154mn (US$165mn) for the six month period to December 2011, similar to the loss of AUD158mn (US$169mn) in the same period in 2010. We believe that HGL's negative impact on Leighton is likely to continue in 2012. Leighton remains keen on pursuing projects in the Middle East (it has recently approved an additional US$127mn of financing for the JV), but HGL appears to be unsuccessful in capturing or realising the region's growth potential. The JV continues to face difficulties with receiving payment for completed projects and stiff competition for new contracts. Between July and December 2011, the JV won two new projects with a combined value of US$596mn, but it had bid for more than US$7bn worth of projects.
To make matters worse, Leighton had disclosed that its subsidiary, Leighton Offshore, is under investigation by the Australian police regarding illegal payments for an oil export contract in Iraq. The resolution of this case could cost Leighton valuable resources that could be used for winning project tenders in 2012.
More Delays For Victorian Desalination Project: The AUD3.5bn (US$3.7bn) Wonthaggi desalination plant in the Australian state of Victoria is proving to be a greater than expected drag on Leighton's financial performance, with the company increasing the provision for cost overruns from the project by AUD218mn (US$233mn) to AUD496mn (US$531mn). Although the project is about 90% completed, there could be delays during the commissioning phase.
This has since transpired in March 2012, with Leighton announcing another rounds writedowns for the Wonthaggi desalination plant and the the Brisbane Airport Link road.
The Australian mining sector, Leighton's main source of revenues, continues to exhibit significant growth potential for the company. Despite the passing of the carbon tax law in November 2011 and a potential near-term slowdown in the demand for commodities from China, mining companies in Australia have continued to announce a swathe of new coal and iron ore projects (see table). These investments will require extensive ancillary infrastructure to power their operations and transport their extracted minerals which should mean plenty of opportunities for a company such as Leighton. Indeed, at the end of December 2011, about 35% of Leighton's order backlog in Australia involves the resources market, while 58% comes from the infrastructure market.
Commodity prices are also expected to remain elevated by historic levels over the long term and this will continue to drive mining activity (and the demand for mining-related infrastructure) in Australia. Meanwhile, the Australian government remains keen on improving social infrastructure facilities, presenting growth opportunities for Leighton over the long term. The Australian government had announced in May during its FY 2011/12 budget that it will invest US$1.8bn and US$500mn in healthcare and education facilities over the next six years, respectively.
Leighton has already won a couple of projects in this sector. In July 2011, the Western Australian government awarded John Holland, a subsidiary of Leighton, an AUD1.2bn contract to manage the counstruction of a children's hospital in Perth. Meanwhile in June 2011, SA Health Patnership - a consortium led by Leighton Contractors - reached financial closure on one of the largest public private partnership projects in Australia, the US$1.98bn New Royal Adelaide Hospital.
Furthermore, Leighton's exposure to several key markets with sizeable demand for infrastructure is likely to place in the company in good stead. While some regions such as the Middle East are expected to creating vast opportunities for Leighton due to their huge fiscal expenditure on infrastructure, other regions such as Mongolia and Indonesia are expected to offering significant opportunities due to their lack of infrastructure to support their growing mining sectors.
In January 2013, Reuters reported that Ontario Teachers' Pension Plan Board has emerged as a final-round bidder for the fibre-optics business of Leighton Holdings, a business valued as much as AUD870mn (US$908.15mn). PCCW is also preparing a bid of around AUD300mn for two of Leighton's smaller data businesses, Metronode and Infoplex. Bidders are working on a February 9 2013 deadline.
In January 2013, Leighton Holdings secured contracts worth a total of AUD1.2bn (US$1.3bn) for Inpex's Ichthys liquefied natural gas project in Australia. Leighton revealed through a stock exchange filing that one of its units has been awarded a AUD923mn (US$1bn) contract for developing infrastructure for the natural gas project's onshore site, as well as a four-year maintenance contract. The awards have boosted the firm's contracts pertaining to the oil and gas industry to more than AUD4.5bn (US$4.87bn). Ichthys is said to be a US$34bn project between Total and Inpex.
In December 2012, Leighton Holdings announced that it had been awarded an AUD200mn (US$210mn) contract to build the new Elizabeth Quay in Perth, reports International Construction. Leighton Holdings will be responsible for the construction of a 2.7-hectare (ha) inlet, parks, promenades, roads and a connecting bridge at the 10ha site on Perth's waterfront. The development of the quay is part of an AUD2.6bn (US$2.7bn) redevelopment of Perth's waterfront. Construction is scheduled to commence in Q113, with an expected completion date of mid-2015.
In December 2012, Leighton Holdings' wholly owned subsidiary John Holland was awarded the second stage of the new Perth children's hospital in West Australia, after completing the first stage of the AUD1.2bn project. The second stage is valued at around AUD851mn and is scheduled to start construction works in mid-2015.
In December 2012, Leighton Holdings announced that it has completed the Wonthaggi desalination plant in Victoria.
In November 2012, the BHP Billiton Mitsubishi Alliance awarded Thiess two contracts worth AUD220mn (US$230.3mn) for work in Australia. Under the contracts, the company will offer construction services for the Caval Ridge Mine Project in the Bowen Basin in Central Queensland. The company will build a coal preparation plant within a coal handling and preparation plant, in addition to a rail loop and holding roads.
In November 2012, the Gateway WA consortium, a consortium lead by Leighton Holdings' subsidiary, Leighton Contractors, started detailed planning for the Gateway WA Perth Airport and Freight Access Project. The AUD1bn project involves improvements around Perth Airport, as well as the nearby Kewdale and Forrestfield industrial estates, including extra lanes on Tonkin Highway, new interchanges and the upgrade of Leach Highway to an expressway. The Gateway WA Project, jointly funded by the State and Federal governments, is expected to be completed by 2017.
In November 2012, Leighton Holdings' subsidiary, Leighton Asia, India and Offshore Group, was selected by Wynn Resorts to design and build the Wynn Cotai integrated hotel resort in Macau. Construction works was scheduled to start in December 2012 and be completed in early 2016.
In November 2012, Leighton Holdings wrote off its AUD63mn investment in Brisbane troll road operator BrisConnections.
In October 2012, John Holland was appointed as the Preferred Respondent to design, construct and maintain the East Goldfields Regional Prison replacement. The AUD232mn involves the construction of a new 350-bed prison at Kalgoorlie.
In September 2012, Leighton Holdings announced that it had completed the sale of Thiess Waste Management to Remondis AG & Co for AUD218mn.
In September 2012, Leighton's Indonesian subsidiary, Leighton Contractors Indonesia, is to build the Australian Embassy in Jakarta. The contractor will work on the AUD230mn (US$240mn) contract as part of a joint venture with local contractor PT Total Bangun Persada.The Australian Embassy complex will occupy a 40,500squaremetre brownfield site in Jakarta's Patra Kuningan district. Construction is scheduled for completion in late 2015.
In August 2012, The Qatar Foundation awarded Leighton Holdings' unit Habtoor Leighton Group (HLG) a contract worth US$124mn for the construction of a rail system in Qatar. This will be the country's first rail system, part of its preparations for the FIFA (Soccer) World Cup in 2022. Under the contract, HLG is to construct a battery-operated tram system, designed to move students around Doha Education City. HLG is expected to complete the system by 2015.
In July 2012, subsidiaries of Leighton Holdings secured a construction contract for a coal-fired power plant project in Davao City and Davao del Sur in the Philippines. The contract, which is worth around AUD122mn, has been awarded for the Therma South power plant, which is being developed by Aboitiz Power Corporation's subsidiary Therma South. Construction work on the 300MW plant is to take 37 months.
The improvement in Leighton Holdings' financial performance after a poor FY2010/11 (July - June) continued in the quarter ending December 2011. Revenues for the six month period ending December 2011 grew by 38% year-on-year (y-o-y) to reach AUD10.1bn, while profit after tax grew by 57% y-o-y to reach AUD340mn (US$364mn) over the same period despite suffering from further writedowns. Although this rise in profitability includes the sale of Leighton's HWE mining iron ore business to BHP Billiton - the company made an after-tax gain of AUD163mn (US$175mn) from the sale - operating margin did improve sharply from 0.7% in H110/11 to 6.8% in H111/12, suggesting that Leighton is generating higher returns from its projects.
Given these bullish financial figures, Leighton initially believes that its earlier profit guidance of AUD600-650mn (US$643-696mn) for the 12-month period ending June 30 2012 is attainable. In fact, Leighton states that it could also deliver a similar level of net profit for the 12-month period ending December 31 2012 (January - December) - the company is moving to a calendar-year financial year so as to align its reporting protocols with its majority shareholder, Hochtief and the German construction group's main owner, Spain-based ACS.
This outlook has since changed, with Leighton announcing another round of writedowns on two of its biggest projects, prompting the company to cut its net profit forecast for 2012 by a third to AUD400-450mn. In a media statement released on March 29 2012, Leighton expects the Brisbane Airport Link road in Queensland to cost the company an additional AUD148mn this financial year, while the Wonthaggi desalination plant in Victoria will cost an extra AUD106mn.