Multiplex's credibility on the line By Stephen Bartholomeusz May 31, 2005
Concerns about Multiplex Group do not relate purely to the scale of losses likely to flow from its $1.2 billion Wembley Stadium project in Britain. Property companies have the odd bad project and the $109 million loss unveiled last night is barely material in the context of a $2.7 billion group.
While investors will not welcome the $65 million downgrade of expectations for this year's profits - as well as a reduction in the forecast distributions - the losses are of less consequence than the weaknesses they have revealed in Multiplex's management .
More disconcerting than the Wembley project is the damage it has done to credibility - which has been compounded by Multiplex's response to the problem.
The issue for Multiplex is that, only a few months ago, it was expressing confidence that the losses on the Wembley contract would not exceed $50 million and, indeed, that it would ultimately generate profits from the contract.
Such was their confidence, the Roberts family, whose scion John Roberts founded the group, indemnified the company to the tune of $50 million.
That was in February - yet last week the company said it had received a report on Wembley that indicated its margins had deteriorated badly and that possible outcomes included a loss position "significantly greater than that which would be covered by the $50 million Roberts family indemnity."
John Roberts stepped down as executive chairman but remains a director. His $50 million indemnity will be called on but has proven inadequate.
After the February scare, Multiplex had gone to some lengths to detail its risk evaluation and management structures and strategies to reassure investors that the Wembley experience was isolated and manageable.
But since then, it has behaved as though it has a problem, selling what were regarded as core assets and looking like a group anxious to generate liquidity in a hurry. It has denied it has a solvency problem, and its principal banker, ANZ, has publicly expressed confidence in the group.
What is at issue is the quality of its construction and development portfolio and ability to manage the risks.Multiplex has relatively modest gearing, generates substantial positive cash flows, has big undrawn lines of credit and $200 million cash, so its solvency should not be an issue.
What is at issue is the quality of its construction and development portfolio and ability to manage the risks within them.
Multiplex entered the British industry in 1998. Today the company is Britain's biggest property group, with a huge pipeline of projects. About two-thirds of its $17.2 billion projects are in Britain.
The astonishing pace and ambition of Multiplex's drive into Britain is even more eye-brow raising when one considers the change in the group's structure and business model in recent years. Since its 2003 $1.2 billion listing, the group has moved at a frenetic pace.
The Wembley problems are not completely isolated, as Multiplex has also had to restate profits on its West India Quay project in London's Docklands. And yesterday the group revealed $18 million of "accounting losses" on another British investment.
The deteriorating position at Wembley raises the question of whether there is a broader, deeper problem in the British portfolio.
Multiplex has made much of the layers of risk management and their sophistication, and responded to the initial problems at Wembley by tightening its systems further.
Yet it appears to have been blind-sided, again, by failing to recognise the severity of the issues at a project that is one of the most high-profile in the world.
In last night's statement, Multiplex said it had completed a review of a significant number of major projects and, other than Wembley, no material issues had been identified.
That would be reassuring, if not for the Wembley experience.
The obvious conclusion to draw from Multiplex's problems is that John Roberts and his son, Multiplex chief executive Andrew Roberts, overestimated Multiplex's capabilities and underestimated the challenges of operating in a new environment as they charged headlong into the British market over the past few years.
Operating very successfully within a market that John Roberts knew intimately and where the group had four decades of experience is, obviously, quite different from trying to replicate from scratch that integrated property group model in a new and bigger market.
Being the most competitive bidder in an unfamiliar market may not necessarily be a winning strategy in the longer term, which is why there appears to be concern about the overall quality of Multiplex's British exposures, despite the group's reassurances.
The combination of the query over the portfolio of projects, the self-evident lack of understanding of the extent of the problems at Wembley and the nature of the reaction to the discovery that the losses were far worse than expected even after the review earlier this year, explains the market's nervousness.
Multiplex's shares will almost certainly be trashed when trading resumes today. Access to capital will disappear for the next few years, it will (as conceded yesterday) have to focus on consolidating its existing portfolio and reducing risk - and the credibility problem will hang over its board and management until they have demonstrated a sustained track record in Britain of delivering to expectations.
For a property group, of course, credibility and confidence are vital. Whatever the current state of Multiplex's finances and prospects, they will probably get worse before they can get better.
