Leighton-Macmahon Tie Up A Modest Positive

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This story features MACMAHON HOLDINGS LIMITED.
For more info SHARE ANALYSIS: MAH
The company is included in ASX300 and ALL-ORDS

By Chris Shaw

When Leighton Holdings ((LEI)) took a 15% stake in fellow contractor Macmahon Holdings ((MAH)) a few months ago there was speculation in the market a bid could follow, but this appears to have been put to rest for the time being at least following a memorandum of understanding announced yesterday between the two companies.

The agreement calls for Leighton to promote Macmahon as a partner of choice to joint venture with it on large infrastructure and resource-related construction projects, while agreeing not to move beyond a 19.9% stake without prior agreement.

According to UBS the deal has little impact on the current status quo of the two companies but does have benefits for both sides. Leighton gains by being able to offset some current capacity constraints such as a lack of specialist labour by utilising Macmahon’s workforce on new projects, while for Macmahon it ensures it remains independent for at least the two years of the agreement.

Macquarie also sees a benefit for Macmahon in that the agreement should facilitate its expansion into the east coast of Australia, where to date the company has had a limited presence.

According to JP Morgan the announcement should put to bed media speculation about Leighton’s interests in the group, but it remains of the view such a tie-up could still occur over the longer-term.

Both it and Macquarie see little impact in terms of earnings in the current year, but the agreement does add to Macquarie’s confidence in its later year forecasts. These call for Macmahon to lift its EPS (earnings per share) to 8.7c in FY08 and 11c in FY09, up from 6.3c in FY07.

ABN Amro is similarly positive on the deal given it gives the company greater exposure to potential deals and it has lifted its earnings forecasts by around 2% in both FY09 and FY10, while upgrading its rating to Buy from Neutral given the opportunities the company will now be exposed to.

ABN is the only broker to make a change to its rating for either company on the back of the agreement, the FNArena database showing Macmahon now rated as Buy twice and Neutral twice while Leighton scores four Buys, three Holds and two Sell recommendations.

The average price targets for the two stocks are $1.83 and $50.97, while the stocks today as at 12.10pm are trading at $1.845, up 10.5c, and $59.87, down $1.73, respectively.

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