Shares plunge on Lendlease’s $350m crunch

The Weekend Australian - - BUSINESS - BEN WILMOT

The push by Lendlease into en­gi­neer­ing is in tat­ters af­ter the global builder and de­vel­oper shocked in­vestors by an­nounc­ing a $350 mil­lion write­down on the trou­bled busi­ness and launched a re­view that may see the unit sold af­ter the com­pany’s shares plunged 18 per cent.

Lendlease, which has racked up heavy losses on Syd­ney’s NorthCon­nex tun­nel project and some other Aus­tralian jobs, ad­mit­ted that it would have to work to win back in­vestor trust and said all op­tions, in­clud­ing a sale, were be­ing con­sid­ered.

Chief ex­ec­u­tive Steve McCann la­belled the an­nounce­ment “ex­tremely dis­ap­point­ing” and said the re­view would look at all parts of the busi­ness with the aim of cut­ting its risk pro­file and re­duc­ing earn­ings volatil­ity.

“At the end of the day, we’ve got to take ac­count­abil­ity, and I have to take per­sonal ac­count­abil­ity as the CEO of this busi­ness, that we haven’t got this busi­ness yet into the shape that it needs to be in,” Mr McCann said.

An­a­lysts pushed the com­pany about the prospect of ex­it­ing the en­gi­neer­ing busi­ness en­tirely, prompt­ing Mr McCann to say the com­pany would “also con­sider all op­tions, so noth­ing’s off the ta­ble”.

Mr McCann fielded ques­tions about the po­ten­tial for sim­i­lar prob­lems to arise on Syd­ney’s WestCon­nex project, say­ing it was yet to com­mence and al­though the Mel­bourne Metro was off to a slower start than the com- pany would like, it was a long­dated project.

The fresh $350m hit fol­lowed an es­ti­mated $150m pro­vi­sion that was taken in the last fi­nan­cial year and an­a­lysts are wor­ried that Lendlease could also be slammed by fur­ther write­downs on its new mar­quee en­gi­neer­ing jobs.

Mac­quarie an­a­lyst Rob Free­man said he was “sur­prised by the down­grade quan­tum in such a short time pe­riod”.

“While wet weather may have been a mi­nor fac­tor in NSW, a dou­bling in the pro­vi­sion since Au­gust is con­cern­ing,” he said, not­ing the over­all pro­vi­sions on prob­lem projects were now 34 per cent of the value of the con­tracts.

He warned that with ma­jor tun­nelling projects still to com­plete, in­clud­ing Mel­bourne Metro and WestCon­nex, “the mar­ket will as­sign a higher risk premium to th­ese earn­ings”. Lendlease ad­mit­ted it had some way to go. “The mar­ket’s con­fi­dence won’t be high, so we’ve got our work to do to gain that con­fi­dence back.”

Lendlease was also quizzed on the tim­ing of its dis­clo­sure just ahead of next week’s an­nual meet­ing but Mr McCann said it con­ducted re­views on a “very reg­u­lar” ba­sis and had dis­closed them “straight away” af­ter prob­lems were un­cov­ered.

The com­pany’s shares plunged 18.34 per cent to close at $14.25 af­ter it dis­closed the prob­lems, which came af­ter con­cerns about the out­look for the lo­cal res­i­den­tial busi­ness emerged.

Lendlease blamed the “un­der­per­for­mance” mainly on a “fur­ther de­te­ri­o­ra­tion” in a small num­ber of projects it had pre­vi­ously iden­ti­fied and cited lower pro­duc­tiv­ity af­ter the tun­nelling phases of NorthCon­nex, wet weather, ac­cess is­sues and re­me­dial work on de­fec­tive de­sign on other projects.

Gold­man Sachs an­a­lysts Ian Ran­dall and Jef­frey Pehl said Lendlease had now booked close to $700m of write­downs pri­mar­ily re­lat­ing to projects with an ini­tial value of $2bn where it had been tar­get­ing gross prof­its of $200m-$250m.

The prob­lems also sparked fears of a div­i­dend cut this fi­nan­cial year but Mr McCann said the com­pany did not give guid­ance, al­though it had a div­i­dend pol­icy and the is­sues were a mat­ter for the board.

The Gold­man Sachs an­a­lysts said the im­pact on fu­ture years should be mi­nor as the prob­lem projects would be com­pleted in fis­cal 2020.

Lendlease is also chas­ing up clients to re­duce its an­tic­i­pated losses but in­vestors worry about prob­lems at a com­pany level.

Source: Bloomberg

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