Australia | Aug 17 2010
By Chris Shaw
Contracting group Leighton Holdings ((LEI)) delivered a full year profit result of $612 million, the result broadly in line with market expectations. The key drivers of earnings were the core infrastructure and contract mining operations.
There were some highlights contained in the numbers, Macquarie seeing these as very strong cash flows, a meaningful reduction in group debt levels and better than expected work-in-hand levels of $41.5 billion.
In the view of RBS Australia, the full year result showed the ability of Leighton to manage and execute a broad portfolio of contracts, skills Macquarie suggests are valuable given the wide range of market conditions across the group's operations at present.
The broad range of operations conducted by Leighton is also a positive for work-in-hand as the company can bid for projects in a number of different market sectors. Deutsche Bank expects work-in-hand can continue to grow towards the company's aspirational target of $50 billion by FY15.
Shorter-term, Credit Suisse expects work-in-hand could hit $43 billion by the time of the Leighton annual general meeting in November, as the group is currently preferred bidder on around $10 billion worth of projects and expects to be shortlisted for another $20 billion of contracts.
This growth in work-in-hand should support double digit earnings growth in FY11 on Deutsche's numbers, this forecast coming despite Deutsche trimming its numbers post the result. The broker cut estimates by 2-6% through to FY15 to reflect a slower recovery in the Australian property market and continued delays in Australian infrastructure spending. This will be partially offset by higher Australian resource spending and growing revenues from India.
Deutsche Bank is now forecasting earnings per share (EPS) for Leighton of 230c in FY11 and 241c in FY12, which compares to Macquarie's EPS forecasts of 229.8c and 260.1c respectively. As Macquarie notes, such an outcome would imply 12% net profit growth in FY11, a result the broker suggests would be a solid result given current market conditions.
Credit Suisse is forecasting EPS for Leighton of 227.7c in FY11 and 250.7c in FY12, while JP Morgan is forecasting respective EPS outcomes of 216.5c and 245.3c. Consensus EPS estimates according to the FNArena database stand at 224.6c for FY11 and 249c for FY12.
On JP Morgan's numbers, Leighton Holdings is trading on around 13.8 times FY11 earnings, a multiple broadly in line with the ASX Industrials multiple at present. It is a discount of around 10% to the company's traditional forward earnings multiple however and so the stock appears good risk adjusted value in the broker's view.
This is especially the case given the significant growth premium that had been priced into the stock earlier this year has now been removed. At current levels JP Morgan rates Leighton as Overweight.
Credit Suisse is less bullish, rating Leighton as Neutral. The broker's main issue is while work-in-hand is increasing a growing portion of the work is being derived from contract mining and overseas markets.
These markets are more capital intensive in the case of contract mining and higher risk in the case of overseas operations, Credit Suisse noting the conversion of offshore work-in-hand into sustainable earnings and cash flow has historically been a challenge for Leighton.
RBS Australia similarly has a Hold rating on Leighton, noting while the market is forecasting double digit earnings growth in FY11, the earnings headwinds present in the Australian construction and property markets and the company's Middle East operations make such an outcome unlikely. RBS is forecasting 7.4% earnings growth in FY11, which translates to EPS estimates of 219.5c this year and 236.9c in FY12.
Longer-term, RBS accepts there are a number of opportunities for Leighton to continue growing earnings, but ongoing tough conditions in markets and investor scepticism over the carrying value of the Al Habtoor joint venture will likely weight on the share price in the near-term in the broker's view.
Overall the FNArena database shows Leighton is rated as Buy four times and Hold six times, with an average price target of $35.66. This is down from 35.91 prior to the full year result.
Shares in Leighton Holdings today are stronger, the stock up 84c or 2.75% at $31.44 as at 11.30am. This compares to a trading range over the past 12 months of $27.61 to $41.70 and implies upside of around 12% to the average price target as shown in the database.