Leighton Holdings Limited has advised that a major review of its operations and asset base for 2010/2011 has shown the Group is now expecting to report a loss of $427M for the financial year versus its previous guidance for a profit of $480 million after tax. The revision is primarily due to losses on Brisbane’s Airport Link Tunnel, and the Victorian Desalination Project, and an impairment of Leighton’s investment in the Habtoor Leighton Group (HLG).
Chief Executive, Mr David Stewart, said this was an extremely disappointing result but that it was important to address these issues so that investors could have confidence about the future.
“We are acting decisively to deal with write-backs on these two problem projects and with the investment in the Middle East. While it is very frustrating to have to deal with the financial consequences, it does now leave Leighton well positioned to return to more normalised growth and earnings in 2011/12 and beyond,” said Mr Stewart.
“On the Airport Link Project in Brisbane, the Thiess John Holland joint venture has continued to encounter design, access, weather, engineering, planning and coordination difficulties that have delayed the works and increased the forecast costs to complete the project.
“Ground conditions in some areas have proved more difficult and variable than anticipated. Acceleration measures and prolongation costs required to overcome project delays resulted in major increases to the forecast final cost,” said Mr Stewart.
“These extra costs mean that the project is forecast to make a pre-tax loss of approximately $430M. This revised forecast is our best estimate of the financial outcome of the project and includes contingencies, which may be required to achieve our completion schedule.
“At the Victorian Desalination Project, wet and windy weather has continued and is expected to impact the delivery of the first water which was originally scheduled for 10 November 2011. However the full takeover of the plant at mid 2012 remains the target. Overall the project is progressing well with the inlet and outlet tunnelling largely complete, as is the 84km water pipeline to Cardinia Reservoir and the High Voltage Electric line,” said Mr Stewart.
“However, poor productivity and the inclement weather have all impacted the construction on the site and, in particular, the reverse osmosis plant. This may trigger a one off $15M penalty and extra costs which have been included in our revised forecast.
“Normally we would not review the carrying value of HLG until June but due to deteriorating cash flow from legacy projects and the requirement for the injection of AED1bn in additional shareholder loans, we believe it prudent to review the carrying value of HLG.
Conditions for our business in the Middle East are still proving to be volatile, recovery of receivables has not improved and the winning of new projects remains slow,” said Mr Stewart.
“While some new work has been awarded recently, including a joint venture to build the ~$585M Al Mafraq Hospital in Abu Dhabi and the ~$105M Abu Dhabi Islamic Bank’s new headquarters in Abu Dhabi, other opportunities remain slow to come through.
“We have revised down our estimates of the contribution to be booked from the HLG business for the remainder of the year due to provisioning, including receivables. Leighton’s equity accounted share of this expense is worth $120M,” said Mr Stewart.
“However, the additional provisioning and shareholder funding required in the current year impacts the carrying value of the asset. We have written down the book value of investment in HLG by a further $200M, reflecting our revised expectation of future earnings from that business.
“This combination of the provisioning and increased impairment results in a revised book value for HLG of $525M,” said Mr Stewart.
“Moving forward we will be changing the way we tender and deliver major projects. We will be enhancing our focus on tender accuracy and risk identification, adequate pricing of risk, adequate time allowances, project delivery and risk management, and client cooperation and issues that could impact project performance,” said Mr Stewart.
“We believe that we have valid claims at both Airport Link and the Victorian Desalination Projects and will be pursuing our rights to recover what we believe we are entitled to, however this will take some time.
“Looking to the future, the Leighton Group is in solid shape with most of our major markets – particularly Australian infrastructure and resources, and the bulk of Asia – proving very positive. Our estimate of work in hand at the end of March is a record $46bn which has a strong level of inherent profitability,” said Mr Stewart.
“Since December 2010, we have been awarded an additional $4.2bn in new work and the Group currently has a strong level of preferred positions.
“Having worked our way through these issues carefully we expect to return to delivering the profits our investors expect and they should be in the range of $600 – $650M for FY12 with further growth beyond that,” said Mr Stewart