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Stock Picks
Try before you buy, deconstructing Leighton Holdings
April 28, 2008
Tim Lincoln, managing director of Lincoln Indicators
Company: Leighton Holdings Limited
Stock code: LEI
Current share price (04/28/08): $44.30
1 year high/low: $65.62/$33.80
This week Tim Lincoln profiles Macmahon Holdings Limited (MAH) and illustrates the importance of considering a stock’s market capitalisation when assessing a potential investment opportunity.
Leighton Holdings Limited (LEI)
Operations
Leighton Holdings Limited (LEI) is the parent company of Australia's largest construction and contract mining group. The group's activities focus on contract, project management and property development in Australia and South East Asia. LEI operates through a number of companies including Thiess, John Holland, Leighton Contractors, Leighton Asia (Northern), Leighton Asia (Southern) and Leighton Properties.
Investment Opinion
LEI has benefited from increased construction activity, infrastructure projects and contract mining. The company has performed exceptionally well over the past three years with an average EPS growth of over 38%. It has also yielded a three-year total investor return of more than 70% p.a. Management believes that the longer term outlook for the company remains positive driven by a record level of work in progress, a strong competitive position in core markets, continued growth in those core markets, and the implementation of a range of new strategic initiatives. With a strong outlook and an increasing yield, LEI may be a suitable investment opportunity for both income and growth seeking investors.
Financials
LEI is currently in a satisfactory position of financial health following a very strong interim result for the period 1 July to 31 December 2007. Strength in the Profit and Loss and Cash Flow statements offsets any Balance Sheet weakness, hence LEI’s financial risk is deemed to be manageable. LEI reported an interim net profit before tax and significant items of $321.712 million, reflecting significant contributions from a number of large construction projects in Australia and the contract mining of iron ore and coal. Pre abnormals EPS increased 30.25% from 68.33 cents to 89.00 cents, while ROA came in at 11.04%.
Valuation
Based on a closing price of $44.30, LEI is trading at a PE ratio of 24.25 times, a premium to the capital goods sector industry group average of 11.46 times, indicating that at current levels the company is potentially fully valued. However, when LEI's current level of growth is factored in, a PEG ratio of 0.80 suggests that the premium may be justified given the potential for further appreciation.
Outlook
The outlook for LEI is positive with further growth forecast for FY08 and beyond. According to the company, the record level of work in progress should translate to FY08 revenue of over $14 billion. LEI’s directors remain confident of achieving a solid operating profit for the period 1 January to 30 June 2008 and expect an increase in profit for the FY08 of at least 30% on FY07’s record profit of $450 million. Consensus analyst forecasts expect LEI to achieve full year EPS of 218.10 cents, a 34.63% increase from the previous period.
Why you must understand a company’s principal activities
The world’s greatest investor, Warren Buffett offers this sound advice, ‘never invest in a company you cannot understand’.
It is important to remember that a share in a company is part ownership of the future earnings of that business. Therefore, it is necessary to have an understanding of the industry that the company operates in and the underlying factors that will influence the growth potential and future profitability of the company.
You may wish to learn more about the principal activities of Leighton Holdings. In addition to looking at the financials, you can broaden your knowledge by visiting the company’s website (www.leighton.com.au), calling the company directly, reading their annual report (and paying particular attention to the chairman’s report), reading company specific news and announcements or attending an Annual General Meeting.
Tim Lincoln is Managing Director of Lincoln, Australia's premier fundamental analysis research house and fund manager offering intelligent sharemarket solutions for the conscientious investor. Click here to register to receive Star Gazing – Lincoln's Fortnightly Stock Tip.
Important information:
All Ordinaries Index: 1/11/2007 - 6853.6 (all time high), 10/4/2008 – 5515.5. Source: Stock Doctor® and www.asx.com.au.
Author: Tim Lincoln. Lincoln Indicators Pty Ltd ACN 006 715 573 (Lincoln) AFSL 237740.
This information is current as at23 April 2008.
Our advice and the advice of our Authorised Representatives (including advice in this communication) are prepared without taking into account your personal circumstances.
You should therefore consider the appropriateness of the advice in light of your objections, financial situation and needs, before acting on it. Where our advice relates to the acquisition or possible acquisition of a managed fund, you should obtain a copy of and consider the Product Disclosure Statement before making any decision. Investments can go up and down. Past performance is not a reliable indicator of future performance.
Our analysis and advice is impacted by AIFRS. Please refer to our website for further information: www.lincolnindicators.com.au/AIFRS. Testimonials are provided by third parties for information purposes only and are not intended to be financial product advice. They do not represent opinion or advice from Lincoln. The information provided may not be appropriate to your particular circumstances. You should consider obtaining your own independent advice before making any decision.
Lincoln, its director, employees and agents, makes no representation and gives no warranty as to the accuracy of this communication and does not accept any responsibility for any errors or inaccuracies in or omissions from this communication (whether negligent or otherwise) and shall not be liable for any loss or damage howsoever arising as a result of any person acting or refraining from acting in reliance on any information contained herein. No reader should rely on this communication as it does not purport to be comprehensive or to render advice. This disclaimer does not purport to exclude any warranties implied by law which may not be lawfully excluded.
Economic and other information taken into account in forming any opinions are subject to change and therefore opinions expressed as to future matters may no longer be reliable.
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