Lendlease has started a “comprehensive review” of its engineering and services infrastructure business after it announced an AUD 350m (USD 253m) after-tax provision on Friday (9 November), due to further delays and errors in its projects.
CEO Stephen McCann said “all options are on the table”, adding that he would not rule out a sale of the business.
The announcement saw the ASX listed company’s share price plummet 18.34% to close at AUD 14.25 by the close of trade on Friday.
The company had already identified problems in this division leading to an AUD 26.1m EBITDA loss for its first half 2018 results for the six months to 31 December 2017, announced in February this year.
McCann agreed the ongoing problems will likely amount to about a 40% cut to the entire Lendleasebusiness profits for the first half 2019 as compared to consensus market forecasts. It has not given earnings guidance itself. The company is due to announce its first half results in February 2019.
The provision relates to several projects Lendlease had previously flagged were in trouble, including the 9km twin road tunnel project, NorthConnex, that will join the M1 Pacific Motorway to the Hills M2 Motorway in Sydney.
Lendlease is however reviewing the entire infrastructure engineering and services business and the projects it is currently building and said it will be even more cautious about bidding on new projects.
The North West Roads Group of CPPIB, QIC, Transurban, Lendlease and Bouygues won the bid for the NorthConnex PPP in May 2013.
“To the extent that we feel we need to mitigate the risk profile – that will mean that we have lower appetite for some of the risks that the market is expected to bear at the moment,” McCann told analysts.
“We have not participated in some projects and some bids – going forward you can expect that we will be very focused on the risks we face. That may mean the addressable market is less than what it was”, he said.
However, McCann added there are still a lot of projects that don’t involve “multi-billion dollar tunnelling risk and we have been winning those”.
He raised two further projects that it has won recently and is watching closely – the Melbourne Metro tunnels and stations PPP and part 3a of WestConnex and have similar complexities to NorthConnex.
“We have won WestConnex 3a [the M4-M5 tunnels] – that hasn’t yet commenced, [but we are] focused on ensuring that gets off to a good start,” he told analysts on Friday.
“Melbourne Metro – we are off to a bit of a slower start there than we would like, but that is a five-year project so it is a bit early to say”, he added.
McCann put the reason for the extra provision down to “lower productivity in the post tunnelling phases of NorthConnex, and excessive wet weather, access issues and remedial work arising from defective design on other projects”.
“We are conducting a very comprehensive review of engineering and services that will include our approach to risk appetite and the terms of conditions we are prepared to enter into and the range of contracts we are prepared to be involved in will be part of that,” he said.
When asked whether it would look at selling the business, McCann said “all options will be considered”.
“The overriding objective is to quarantine this [poor] performance and understand that we have the right risk approach, the right origination approach and the right people in the right roles,” he said. “Nothing is off the table.”
Lendlease’s views are being reflected across the construction sector in Australia as it grapples with a massive wave of new projects, particularly in NSW and Victoria, with both states promising even more in the lead up to elections in both jurisdictions.
The Victorian government recently ruled out Lendlease, CIMIC and John Holland bidding together for the AUD 15.8bn North East Link availability PPP to encourage more offshore competitors to enter the market.