Australia | Apr 21 2009
By Greg Peel
Across the globe, governments are attempting to reflate sliding economies by throwing money at public works programs. The US will be spending printed money on its ailing road and bridge system. China will be turning trading surpluses towards electricity and phone networks. Australia will go into deficit to spend on social infrastructure (hospitals, schools, public transport, government housing and so forth). It’s a global construction bonanza intended to reignite demand for commodities, equipment and labour.
Australia’s local construction success story is Leighton Holdings ((LEI)). Leighton had been enjoying boom times in recent years by winning contracts for everything from local mining infrastructure to fantasy-land tourist projects in Dubai. A sharp downturn in both the mining industry and the global economy has seen Leighton shares trounced along with everyone else, but there is still work out there, particularly in local LNG development, and Leighton management has always maintained that Dubai is only one Emirate with grand plans. Now Leighton stands to be a big winner from the Australian government’s spending plans, as well as concurrent state government programs.
Yesterday Leighton announced it had signed a contract with the Queensland government to build and maintain seven schools in the south west of the state. JP Morgan analysts note this will add about $250m to Leighton’s work in hand (WIH) schedule. This is exemplary of the sort of WIH growth the market is now expecting Leighton to achieve, and reason why Leighton shares have performed well lately in the stock market bounce.
But the question is: Will such contract wins keep Leighton’s WIH growing, or will losses on the other side see it fall? JP Morgan suggests the latter.
Only last week, Leighton’s WIH was reduced when the $343m Dubai airport project was cancelled. JPM calculates that in 2009 to date, Leighton has won new contracts, contract variations and extensions worth less than $3bn. This would suggest new contract wins are not keeping pace with work being completed. At the end of the first half FY09, Leighton’s WIH reached a record $38bn. It now appears to be declining.
While Leighton stands to win at least its fair share of government work, notes JPM, demand in its core markets of Australian mining, energy and utility infrastructure is declining, as is construction in the Gulf.
The resources sector is abandoning or shutting down projects, rather than firing up new ones, and Dubai is potentially a disaster waiting to happen. FNArena pointed out many months ago that while many in the world assume Dubai’s explosive development of hotels, marinas and various other tourist utopias is funded by petrodollars, in reality Dubai has no oil. Fantasy Land is a debt-funded bubble potentially waiting to burst as the targeted uber-rich set become merely rich and shy away from such excesses.
Leighton has always argued that Dubai is only one Emirate, and there are others with plenty of real petrodollars – Abu Dhabi for example – to pick up any slack from Dubai, but the reality is all oil-producing nations are hurting from the 70% fall in the price of oil and are battening down the hatches.
JP Morgan believes a big contraction in private sector spending in related areas has seen the growth opportunities for Leighton “shrink considerably”. The analysts suggest investors keep a wary eye out for the company’s third quarter results, due out May 14, and the WIH and earnings guidance updates therein.
The FNArena broker database currently shows a total of five Sell ratings on Leighton (including JP Morgan) with two Holds and only one Buy (Deutsche Bank). The average target is nevertheless $22.37 to today’s trade around $20.50 but the range is very wide. GSJB Were is the top marker at $30.07 (despite only rating Hold) while Citi (Sell) is at a lowly $16.00.