Shares plunge on Lendlease’s $350m crunch
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.