Australia | Nov 02 2012
– Leighton updates on earnings
– Full year guidance reiterated, implies stronger final quarter
– Brokers adjust earnings and targets
– Market headwinds and gearing seen as issues
By Chris Shaw
For the nine months to the end of September, Leighton Holdings ((LEI)) reported net profit after tax of $317 million, the result including a one-off gain of $81 million from the sale of the Thiess Waste Management assets.
Along with the result, management reiterated full year underlying net profit guidance of $400-$450 million, which implies a stronger December quarter result of between $164-$214 million. UBS is not as confident given a slowing mining capex environment and trims earnings forecasts for the full year by 2.5% to $397 million.
While retaining its forecasts, BA Merrill Lynch also suggests there is downside risk to consensus earnings forecasts for Leighton given the December quarter can be more cyclical and current headwinds in the group's markets.
These headwinds are an issue for RBS Australia as while FY12 earnings guidance is achievable the outlook for FY13 earnings has become more clouded. To reflect this RBS has lowered earnings estimates for FY13 by 8% from already below consensus levels, this to account for both some specific project risks and the potential downside risk stemming from Leighton's Middle East operations.
RBS is now forecasting earnings per share (EPS) for Leighton of 120.6c this year and 164.6c for FY13, while consensus EPS forecasts according to the FNArena database stand at 133.9c and 180c respectively.
The changes to earnings estimates made by RBS and others have impacted on price targets for Leighton, the database showing a consensus target of $18.16, down from $18.52 prior to the update. Targets range from RBS at $15.65 to BA-ML at $20.20.
In the view of RBS as consensus earnings forecasts for Leighton come down over the course of coming months, so too will the share price. As a result, RBS has downgraded its rating on Leighton to Sell from Hold.
This brings RBS in line with Macquarie, who suggests the valuation for Leighton is relatively full at present when the stock is compared to contracting peers. Also supporting Macquarie's Sell rating is ongoing concerns with respect to the balance sheet and $500-$600 million in related shareholder loans.
These concerns are overplayed in the view of BA-ML, who retains a Buy rating on Leighton. The broker notes work-in-hand has remained broadly in line with June 2012 levels, which implies the order book continues to be replenished.
As well, further asset sales such as that of Thiess in the September quarter are expected, which BA-ML suggests will strengthen the group's balance sheet in coming months. UBS agrees, expecting gearing will fall from around 48% in net debt to net debt plus equity terms now to around 44% by the end of this year.
BA-ML sees longer-term value at current levels given the potential for a turnaround in the share price if assumed margin expansion is achieved in FY13. Citi also sees scope for some margin improvement as more higher margin oil and gas worked is ramped up in coming months.
UBS is more cautious though, retaining a Neutral rating given the stock is trading near its unchanged price target of $18.00. Overall, the FNArena database shows Leighton is rated as Buy only by BA-ML, compared to five Hold ratings and two Sell recommendations.
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