With previous significant troubles with their engineering arm of global infrastructure and development group, Lendlease, signs point to complete removal of the business. This will be expected in the form of a demerger or a direct sale.
In a briefing session for analysts, the company provided a more comprehensive update of the issues besetting the division. This caused a further $350 million impairment to the engineering business early last month.
As a result, an additional 30 percent decrease of Lendlease’s market value has sparked an acknowledgment from chief executive Steve McCann that it’s investors were beginning to or already had lost confidence in the group.
Tunnelling at the NorthConnex project originally sparked the lowered levels of productivity. This was only spurred on by “excessive” wet weather, access issues and remedial work arising from “defective design on other projects” according to McCann.
Analysts were informed by McCann that aside from the NorthConnex issues, the Brisbane Gateway Upgrade North, valued at $689 million contract, of which 90 per cent is complete has been impacted by labour productivity issues and weather-related costs.
Also in Brisbane, the Kingsford Smith Drive project worth $501 million, of which 75 per cent is complete, has a defect in the design that requires rectification. This has also led to provisions for delay and other costs.
Analysts from Macquarie Equities have predicted that Lendlease will label the engineering business non-core, after the half-year results in February. This would lead to a straight sale, as opposed to a demerger which would involve risks for the business and an unclean profile for earnings and losses.
“A sale/demerger of engineering would be positive in light of the current share price and good outlook for other divisions in our view. Despite this, with risk around further provisions on work yet to complete, we retain Neutral,” Macquarie says.
Credit Suisse analysts said they “feel the board is likely to opt for a demerger of the engineering business”, while being open to consider offers for the business.
“The timeline is likely to be the second half of the 2020 financial year. By this point, there should
be sufficient clarity on delivery of the problem projects of NorthConnex, Gateway Upgrade North Kingsford Smith Drive, that are due to complete by end of calendar 2020,” Credit Suisse analysts said.
“However, if there are further cost overruns on these projects or on other projects, then the board may need to consider the less attractive option of a wind-down.”
“We are more cautious than we have been in the past but we have a track record of strong performance,” Mr McCann said.
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