Leighton Holdings Limited has announced a huge revision of its profit forcast for 2010-2011, expecting to report a loss of $427 million for the financial year versus its previous guidance for a profit of $480 million after tax.

 

The company says the revision is primarily due to write-backs of expected profit on the Airport Link project in Queensland and the Victorian Desalination Project, and an impairment of Leighton’s investment in the Habtoor Leighton Group (HLG).

 

Chief Executive, Mr David Stewart, said the company was ‘acting decisively’ to

deal with write-backs on these two problem projects and with the investment in the Middle East.

 

“While it is very frustrating to have to deal with the financial consequences, it does now leave Leighton well positioned to return to more normalised growth and earnings in 2011/12 and beyond,” said Mr Stewart.

 

“On the Airport Link Project in Brisbane, the Thiess John Holland joint venture has continued to encounter design, access, weather, engineering, planning and coordination difficulties that have delayed the works and increased the forecast costs to complete the project.

 

“Ground conditions in some areas have proved more difficult and variable than anticipated. Acceleration measures and prolongation costs required to overcome project delays resulted in major increases to the forecast final cost,” said Mr Stewart.

 

“These extra costs mean that the project is forecast to make a pre-tax loss of approximately $430 million. This revised forecast is our best estimate of the financial outcome of the project and includes contingencies which may be required to achieve our completion schedule.

 

“At the Victorian Desalination Project, being built at Wonthaggi in Victoria, wet and windy weather has continued and is expected to impact the delivery of the first water which was originally scheduled for 10 November 2011. However the full takeover of the plant at mid 2012 remains the target. Overall the project is progressing well with the inlet and outlet tunnelling largely complete, as is the 84 kilometre water pipeline to Cardinia Reservoir and the High Voltage Electric line,” said Mr Stewart.

 

“However, poor productivity and the inclement weather have all impacted the construction on the site and, in particular, the reverse osmosis plant. This may trigger a one off $15m penalty and extra costs which have been included in our revised forecast.

 

“Normally we would not review the carrying value of HLG until June but due to deteriorating cashflow from legacy projects and the requirement for the injection of AED1 billion in additional shareholder loans, we believe it prudent to review the carrying value of HLG. Conditions for our business in the Middle East are still proving to be volatile, recovery of receivables has not improved and the winning of new projects remains slow,” said Mr Stewart.

 

“While some new work has been awarded recently, including a joint venture to build the ~$585 million Al Mafraq Hospital in Abu Dhabi and the ~$105 million Abu Dhabi Islamic Bank’s new headquarters in Abu Dhabi, other opportunities remain slow to come through.

 

“We have revised down our estimates of the contribution to be booked from the HLG business for the remainder of the year due to provisioning, including receivables. Leighton’s equity accounted share of this expense is worth $120 million,” said Mr Stewart.

 

“However, the additional provisioning and shareholder funding required in the current year impacts the carrying value of the asset. We have written down the book value of investment in HLG by a further $200 million, reflecting our revised expectation of future earnings from that business.

 

“This combination of the provisioning and increased impairment results in a revised book value for HLG of $525 million,” said Mr Stewart.

 

Mr Stewart said that the company would be changing the way it tenders and delivers major projects.

 

“We will be enhancing our focus on tender accuracy and risk identification, adequate pricing of risk, adequate time allowances, project delivery and risk management, and client cooperation and issues that could impact project performance,” he said.

 

“We believe that we have valid claims at both Airport Link and the Victorian Desalination Projects and will be pursuing our rights to recover what we believe we are entitled to, however this will take some time.

 

He said that despite the profit reversal, the Leighton Group was “in solid shape with most of our major markets – particularly Australian infrastructure and resources, and the bulk of Asia – proving very positive.”

 

The company’s estimated work in hand at the end of March is a record $46 billion, with $4.2 billion in new work awarded since December 2010.

 

 “Having worked our way through these issues carefully we expect to return to delivering the profits our investors expect and they should be in the range of $600 - $650 million for FY12 with further growth beyond that,” said Mr Stewart.