Shares in Multiplex (MXG) are expected to come under heavy...

Shares in Multiplex (MXG) are expected to come under heavy selling pressure this week when the company reveals the extent of its losses on the $1.2bn Wembley project in the UK. In a statement on Friday management stated that “project margins may have deteriorated significantly” without specifying by how much.

Wembley: Management credibility has been an issue and Wembley should have been the most heavily scrutinised project internally. However, the fact that now, in late May, its position is still up in the air is a strong negative.


Forecast reducing on a daily basis:Macquarie have allowed for a $50m pre-tax loss this year (above the $50m that the Roberts family underwrote) and in the 2006 financial year (FY06) have taken another $50m of contingencies pre-tax against construction profits. Longer term Macquarie have sharply reduced the roll-out of the UK construction model, anticipating the company moves 'back to basics'. Macquarie’s 2005 financial year net profit after tax forecast is now $180.3m (inclusive of the Wembley loss), down $35 m on prior forecasts.

Dividend per share (DPS) likely to fall: in a stringent back to basics approach Macquarie expect the distribution policy to be revised to allow the company (as opposed to the trust) time to re-establish a level of financial stability.

Break-up value of property trust and construction assets: a de-stapling of the company and trust assets would separate the risks of this business more appropriately between the listed property index and the development & construction index. However, Macquarie sees less value in this structure relative to the group continuing to trade together. This is due largely to the construction business, which in a break-up we value at zero. Macquarie’s first pass at a break-up scenario is $2.78, being $2.73 from the trust and only 5¢ from the corporation. Any potential buyer of the construction business would likely force a strong hand for warranties on contingent liabilities on contracts outstanding, hence the conservative valuation.

Action and Recommendation: Macquarie downgraded their view on MXG to Underperform and revised the 12-month share price target down 16% to $3.69 (may be further revised following company update). Over the short term, Macquarie expect MXG shares to trade at a discount not only to this target but also the assessed break-up value of $2.78