More pain for shareholders in Lendlease today after the shock news Friday of $350 million of impairments in its engineering and services business saw a downgrade from a lead ratings agency.
Lendlease shares fell 18.3% on Friday in the wake of the update to end at $14.25, with more than $1.8 billion cut from the company’s market value. That’s the lowest the shares have been for nearly 22 months.
It’s likely the shares will fall further today with the wider market looking at a half a per cent slide today after a fall in the futures trading on Saturday morning, our time.
The troubled contracts for Sydney’s NorthConnex and the Melbourne Metro rail are at the heart of the impairments, with possibly more to come.
In a release after the market’s close on Friday, rating group, Moody’s said it had lowered the outlook on Lendlease from stable to negative.
Maurice O’Connell, a Moody’s vice president and senior credit officer, said given the complex nature of some of the projects, there was a possibility of more provisions in the future, which would add to the earnings and debt challenges arising from the two provisions announced to date.
Mr O’Connell said the ratings outlook could return to stable when it becomes clearer that the current provisioning is adequate and that Lendlease would remain within the financial metrics set for its rating.
Lendlease has identified further underperformance in the financial position of its Engineering and Services Business. To account for this underperformance it is anticipated Lendlease will take a provision in the order of $350 million after tax for the December half of the 2018-19 financial year.
This underperformance predominantly relates to further deterioration in the small number of projects previously identified. This is attributed to a number of issues including lower productivity in the post tunneling phases of NorthConnex; and excessive wet weather, access issues and remedial work arising from a defective design on other projects.
The company said measures are being undertaken to mitigate the anticipated losses including negotiations with third parties. However, at this stage, it is unclear as to the extent to which these negotiations will be successful to change the underperformance.
The new provision is in addition to the $200 million made in the full year results and is due to a range of issues such as including lower productivity in the post tunneling phases of NorthConnex; and excessive wet weather, access issues and remedial work arising from a defective design on other projects.
Lendlease chief executive Steve McCann said that “at this stage, it is unclear as to the extent to which these negotiations will be successful to mitigate the underperformance,” Mr. McCann said.
“Today’s announcement about the engineering and services business is extremely disappointing particularly given the underlying performance across Lendlease’s other businesses.
”Our international pipeline of landmark urbanisation projects, especially those in Europe has materially grown in the last 12 months giving us earnings visibility well into the future.”
Mr. McCann said on Friday the company “had a lot of work to do to win back market confidence”.
