Lendlease shares lose $2.3b in two days, with potential for more write-downs
Lendlease’s fortunes have continued to slide, with its market value shedding a further $500 million on Monday, after a steep plunge last Friday.
This brings the company’s total losses — across two consecutive trading days — to about $2.3 billion, with its share price sinking to its lowest level in two years.
What sparked the sell-off was Lendlease’s shock announcement, on Friday, that it will write down $350 million from its 2019 half-year results due to the underperformance of its engineering and services business.
That division is responsible for major infrastructure projects, including the NorthConnex motorway tunnel (Northern Sydney), and new tunnels and stations for Melbourne Metro.
The company’s explanation for the write-down was: “Lower productivity in the post-tunnelling phases of NorthConnex, excessive wet weather, access issues and remedial work arising from defective design on other projects”.
The immediate reaction was a 19 per cent plunge in the construction and development giant’s share price — its biggest one-day fall in almost a decade.
Lendlease’s chief executive Steve McCann was blunt to investors, and called the write-down “extremely disappointing, particularly given the underlying performance across Lendlease’s other businesses”.
The company said it would conduct a review of its business and seek assistance from third parties to offset some of its upcoming losses.
Potential for further write-downs
If Lendlease were to “scale back its growth ambitions” — or get out of the engineering business completely — that would drastically reduce its risk profile and overheads, according to Goldman Sachs.
It would also be “positively received by investors”, said Ian Randall, Goldman’s executive director of real estate.
Mr Randall also observed that Lendlease’s $350 million write-down was worse than he had expected.
“Although there was always a risk of further provisioning regarding Lendlease’s ‘problem’ engineering projects, we had expected any further write-downs to be relatively minor,” he noted.
This was because “the most complex component of NorthConnex [the tunnelling] is now complete, and the projects are all more than 60 per cent complete and due to complete by FY20.
“Hence, the magnitude of today’s write-downs … is truly surprising.”
Mr Randall also warned that Lendlease could announce further write-downs.
“Management’s comments on [Friday’s] call that the $1.7 billion Melbourne Metro project has also ‘started a little more slowly’ than expected (albeit with five years to completion) will likely raise further questions [regarding] the potential for future write-downs on this project.”
Lendlease shares closed 6.2 per cent lower at $13.37 — its lowest value since November 2016. Its market value has fallen to $7.6 billion.