Australia | Aug 15 2006
By Greg Peel
Little Leighton Holdings (LEI) has been winning the unpopularity award in the FN Arena database for some time now, boasting the lowest sentiment indicator of all covered stocks throughout most of 2005 and H1 2006. But the FY06 result came as a bit of a shock.
Leighton reported a profit of $276.1m, compared to market consensus of $258.5m – a 28% increase on last year. Guidance was for further profit growth in FY07 of 15%. The Mining & Resources division faired particularly well, which should not have been a great stretch of the imagination, but Property Development also posted a surprisingly strong result.
Analysts responded by immediately raising FY07 earnings forecasts by 8-15% depending on how pessimistic they’d been in the first place. Target prices shot up all over the place. Three brokers were forced to upgrade their ratings, all from Sell equivalents previously.
ABN Amro has upgraded from Sell to Hold and suggests upbeat guidance may yet be exceeded in FY07. The analysts note Leighton has reached a low FY07 PE of 15.6x which is 22% off its one-year forward multiple peak of 20x. ABN is now expecting a cycle of upgrades through FY07.
GSJB Were has upgraded from Underperform to Marketperform, also noting the PE discount. Weres is more circumspect, however, suggesting the current share price still does not fully reflect the risks inherent in the contracting business. However, the likelihood of further contract success in the short term should maintain the share price at these levels.
Macquarie has upgraded form Underperform to Neutral and suggests momentum into FY07 could see further share price upside. The analysts do note, however, that Leighton’s share price tends to track the work-in-hand figure, and that is currently at a high. Significant contract wins would be needed to sustain this level.
UBS is also wary of the work-in-hand relationship, deciding to give these numbers closer consideration before moving to an upgrade. Despite earnings increases, UBS has not yet shifted from Reduce.
SB Citigroup is sticking to Hold, as the analysts suggest the upgrade cycle is continuing “but we must be nearing the peak”. Merrill Lynch believes there may be upside in FY07 if Leighton can push on to 20% earnings growth, but for now the analysts have stuck to Neutral.
In a stance usually reserved for the analysts at JP Morgan, Deutsche Bank analysts had been screaming for a while that the market had got Leighton very wrong. Mining & Resources was the area where Deutsche saw the greatest earnings potential, and they were dead right. They can now be excused for a bout of “I told you so”. Even Deutsche was surprised by the Property Development result, and cannot now reiterate more strongly their Buy recommendation which has stood since May.
But never underestimate JP Morgan. Yes, the analysts are playing contra, but this time it’s through a more cynical approach to the Leighton result. While other analysts noted, but were prepared to let slip, more one-off loss write-offs in the result, Morgans has come down hard. “When will the one-offs end?” the analysts cry.
While raising earnings forecasts by 9%, the analysts have stated “In our view the current share price fails to reflect the ongoing risks attached to an investment in LEI”. Morgans has retained Underweight.
Credit Suisse (Underperform) did not deign to grace us with its views in this morning’s report.
That leaves Leighton on a 1/3/5 Buy/Hold/Sell ratio of the nine brokers in the database. The 12-month target average has jumped from $14.96 to $16.10 and the sentiment indicator has finally lifted off the bottom, rising from -0.56 to -0.44.
Leighton closed yesterday at $17.95, having shot up about 50c on the result release.