MRE Macquarie Research Equities has retained Leighton Holdings (LEI) Outperform recommendation and $60.09 target Price.

Leighton Holdings (LEI) Still Money to Be Made in Construction

LEI has pulled back significantly in the past month after hitting it’s month high of $57.97 on 19th May and is now trading near it’s month low of $49.43. Macquarie Research Equities (MRE) attended LEI’s analyst briefing yesterday and were impressed with the companies progress. MRE retain their Outperform recommendation and $60.09 target Price, ~ 18.5% above yesterday’s close.

Although property markets globally appear to be struggling of late there are still avenues for profits in the construction industry. Through diversifying projects and riding the resource boom Leighton Holdings (LEI) has been able to navigate this path. The latest of the construction giant’s projects is the $2 billion North South Bypass Tunnel (NSBT) and “Gateway” in Brisbane. Macquarie Research Equities (MRE) has reviewed these projects in order to quantify the impact to the company as a whole.

With population growth in Brisbane exceeding expectations, LEI are confident in their current traffic flow forecasts. LEI has capitalised on this growth through negotiating with various contractors to ensure the projects completion in line ahead of budget. Considering costs such as steel and concrete are largely fixed, the risk of unexpected price increases for material inputs has been removed. The tolling systems are due to be completed in 1Q09 and management re-iterated the expected completion date of June 2009 for the project.

LEI has historically been able to hit or beat target dates which makes the recent announcement all the more enticing. This becomes particularly apparent with the majority of technical risks having been overcome to date. Evidence is seen in previous projects such as M7 and Eastlink. With Part A (southern section) having just been completed and Part B (northern section) set for completion in mid- 2009 this guide date is all the more realistic. Part C has the most risk attached and involves the upgrade of the existing motorway, due in November 2009 with the existing bridge set to be completed by June 2011.

The remainder of LEI’s domestic business remains very positive going forward with further margin expansion expected. Completing the current projects early will further add to this. With their Arabian project Al Habtoor trading ahead of plan MRE’s outperform rating looks highly justified. Overall MRE has forecast 14.8% CAGR revenue growth over the next three years which is reflected in an stock target that at $60.09 has 19% premium to the current price of $50.70.