Key points
- Leighton Holdings (Leighton) reported underlying NPAT increased 6% to $620m. The results were driven by stable revenues ($22.3bn), strong operating cash flows (up 26% to A$1.6bn) and assets sales, which were used to sharply reduce net gearing to around zero (from 37% in June 2014)
- Significant derisking of the balance sheet including, for the first time, making a $675m provision relating to debts on problem projects
- Solid liquidity was reported with cash from operations up 26% to $1.4bn and cash on balance sheet of around $2.0bn
- The company forecasts FY15 NPAT of $450-520m, expects to sell its property business and continue to reduce mining assets
- Management reiterated their intention to continue restructuring efforts including continued delivering and derisking of the balance sheet and expect further improvement in margins
- Overall positive results, solid credit profile and reliable FY15 guidance
Details
Source: FIIG Securities, Company presentation
Summary
- Untidy FY14 results which included gains from asset sales ($973m), a provision for bad debtors ($675m) and restructuring costs
- Top line NPAT rose 33% to $676.5m and revenue was $24.1bn (down slightly on FY13 $24.4bn)
- Revenue from continuing operations was up 4% to $18bn, underpinned by a 10% increase in construction. Underlying NPAT was up 6% to $620m
- Work in hand declined to $37bn ($30bn from continuing operations) which is a 13% decrease from YE13. Management attributed the decline to a more disciplined approach to pre-contract risk assessment and the impact of macro-economic conditions. Management indicated the current 12 month tender pipeline is above the equivalent pipeline (from a risk perspective) at the time of the FY13 result
Source: FIIG Securities, Company presentation
- Gearing has reduced from 37% at Jun 14 to 30% at Dec 14, but after including the proceeds from asset sales (due to be received in 1H15), the company would be in a pro forma net cash position of $20m at YE14 and therefore negative net gearing
- For the first time, LEI has made a $675m provision relating to debts on problem projects. This has put some “conservatism” in the balance sheet
Efficiency and streamlining the business
- Costs were down 3%
- Reduced a shortfall in contract payments by clients by $2bn (last year the company radically changed the way it collected billions of dollars owed by its customers, including standardising processes across the group, when the level of debts swelled to $5bn)
- Trade receivables stood at $3.4bn compared to $5.4bn six months earlier and working capital has significantly improved by $1.4bn over the same 6 months
Outlook
- The company forecasts $450-520m FY15 NPAT, reflecting a significant reduction in revenue (30-40% mainly from divestments), which should be partially offset by a material improvement in net margins (30-40%). The company needs to achieve $50m of cost savings to meet the low end of the FY15 guidance range which appears achievable given it only represents 0.3% of costs from the company’s continuing operations
Ownership background
- Leighton is currently 69.62% owned by HOCHTIEF AG, which is in turn 50.35% owned by ACS. Both entities have financial profiles that are significantly weaker than Leighton
- There is limited risk however of financial support being provided to the parent by Leighton, in the short to medium term, other than normal dividend distributions
- Provisions in HOCHTIEF’s debt and bond facilities prohibit almost all transactions with ACS, including upstream guarantees and loans, profit transfers, and non-arms-length transactions. In relation to dividends, HOCHTIEF has undertaken that it will not propose to pay a dividend of 75% or more. The same level of protection does not, at this stage, apply between HOCHTIEF as parent and Leighton
Bondholder protections: Change of control/downgrade
- The bond indenture (Leighton Finance USA 2022s) provides bondholders the right to put the bonds back to the company at a purchase price equal to 101% of the principal plus any accrued and unpaid interest if any single party appoints more than 50% of seats on the board, which results in Leighton being downgraded to sub-investment grade shortly after the event (by two rating agencies)
- Therefore, bondholders have the right (not obligation) to put the bonds back at $101. This effectively provides a base at which they can sell their bonds if a change of control drives a downgrade to sub-investment, noting this is however significantly lower than the current circa $110 pricing