Softer MidEast market may hamper Leighton January 7, 2009 - 4:58PM
Leighton Holdings' latest profit guidance may be at risk because of the slowing Australian resources sector and Middle Eastern construction market, analysts say.
"Material slowdowns in Australian resources and Dubai construction represents clear risks to near-term earnings growth,'' JPMorgan analysts led by Alistair Reid said in a research note.
Australia's largest construction firm issued a profit warning on Tuesday that said its first half net profit will be 60% lower than previously forecast at $100 million.
It's full-year earnings are expected to drop by 21% to $480 million.
This was due to write-downs in investments in listed entities, namely toll road operators, a contract miner and a property developer, which have been savaged in value by the financial market meltdown.
The JPMorgan analysts said Leighton's profit warning "does not include the potential impact of either of these two factors''.
"What's more, we don't believe these downside risks are fully factored into the share price,'' they said.
Leighton's shares were hammered on Tuesday after the announcement, falling 11.75% to $25.00. Today they received another beating, falling $1.20, or 4.8%, to $23.80.
JPMorgan now values Leighton at $20.57, down from $23.20 previously.
The broker said contract suspensions and late payments in Dubai indicated that Leighton's 45% held Al Habtoor Leighton Group "will have to wait longer to access expected profits''.
Leighton, which is 51% owned by German engineering giant Hochtief, spent $860 million acquiring the stake in the Dubai-based company in late 2007.
Last month, construction was suspended at the Trump Tower project in Dubai, a Al Habtoor-Murray & Roberts' joint venture.
Leighton said this would not have a material financial impact on its Dubai arm, but valued the contract at about $540 million when it was awarded in June.
Al Habtoor won an $800 million contract to construct a new concourse at Dubai Airport later in December.
JPMorgan said project deferrals were on the rise "but developers remain committed to their plans and are unlikely to cancel work''.
It said it was trimming its projections of Leighton's Persian Gulf earnings contribution, especially Al Habtoor, "on our expectation of weaker construction activity''.
The broker said it also expected lower construction activity in Asia in line with a synchronised global economic slowdown in calendar 2009.
However, this would be partially offset by the Federal Government's multi-billion dollar infrastructure program.
LEI Price at posting:
$21.34 Sentiment: LT Buy Disclosure: Held
