Leighton (LEI) Update

Submitted by Craig Strzelecki on 15 May, 2007 - 19:07

Leighton (LEI) shares have a reinstated Outperform recommendation and a price target of $42.01 from sharemarket analyst Macquarie Research Equities. Shares in the project developer have almost doubled since the start of the year, on the back of new projects being announced and takeover speculation fuelling the share price. Profit upgrades have also spurred the stock to new highs following yesterday’s reported 9-month net profit, which was up 62% on last year. Leighton's CFO also announced that further profit growth of at least 17% is expected in FY08. With valuations now looking very stretched across most of the Australian market, with PER’s (except resources) at all time highs, LEI shares offer one of the few 'very positive' earnings growth large cap opportunities in the market. 9-month NPAT was $273m, which was up 62% on last year. LEI expects NPAT growth of 55% in FY07 versus +45% previously which implies FY07 NPAT of $428m. CFO Adamsas expects further profit growth in FY08 with NPAT 'not less than $500m’ which in turn implies at least 17% NPAT growth on FY07's $428m. Historical comparisons indicate modest further upside risk in FY07: LEI's 9 month NPAT equates to 63.6% of revised NPAT. If the analyst applied last year’s 61% ratio, this would generate NPAT of closer to $448m and a similar historical comparison of PBT margins generates implied FY07 NPAT of $440m (we forecast $441m). Leighton's FY07/08 guidance does not include potential Eastlink early finish benefit: LEI's $2.5bn Eastlink contract is running up to 12 months ahead of the scheduled November 2008 completion date. Analyst's estimate this benefit could be much larger than the $20–30m from the smaller M7 contract. The drivers of LEI’s 21% forecast FY08 NPAT growth includes revenues increasing to $13bn+, base margin improvement in LEI’s Australian infrastructure and resources order book and recovery in the Asian business from a disappointing FY07. LEI’s increased diversification and size means that it can more readily absorb problem contracts (this year it was Indonesia). Profit margins returning to historic levels: The analyt's FY07 and FY08 NPAT margins of 3.63% and 3.97% respectively represent a return to the 3.6–3.9% levels seen in the early 2000s. In other words, analyst margin assumptions look very achievable given the strength of current end-markets and sector consolidation over the last seven years. The recovery is driven by Leighton's order book shifting to higher quality large infrastructure projects and moving beyond legacy contracts (ie Package F Perth to Mandurah). Earnings revision: The analyst have increased their FY07, FY08 and FY09 EPS by 7%, 8% and 17% respectively. FY08 consensus upgrades are likely to be larger than our 8%. Analyst's FY09 earnings upgrade is substantial and reflects 'a stronger for longer' view of the cycle with further potential upside from new acquisitions. The analyst's are reinstating an outperform recommendation with a $42.01 share target price based on a domestic peer valuation. They expect the stock's high multiples to persist while it remains in an earnings upgrade phase and given the strong macro outlook. In addition, Leighton (LEI) $2bn in balance sheet capacity means there is option value from a re-gearing of the balance sheet (eg via acquisition). They note that Leighton's 21% FY08 EPS growth on a PER of 20.6x offers a superior price to growth trade-off than the All-Industrials (ex banks, LPTs) trading on 18x FY08 but with only 8% earnings growth forecast.

Leighton Holdings Limited is listed on the Australian Stock Exchange (ASX) under stock code LEI. You can view their investor website here. LEI was listed on the ASX on 11 December, 1962. Find out the meaning of the recommendations in this primer. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade LEI. Wallace King is the CEO and David Mortimer is the Chairman for Leighton Holdings. Leighton Holdings Limited is the parent company of Australia's largest project development and contracting group. Group companies undertake activity for clients in the telecommunications, engineering and infrastructure, building and property, mining and resources, and environmental services markets. Operations span projects in Australia, SE Asia, NZ, Vietnam, China and South America. Check your charts and good luck with your share trading!