This article is from the Australian Property Journal archive
Lend Lease shares fell almost 5% yesterday following revelations that the group has struck major losses in its United Kingdom construction division.
Yesterday, Lend Lease revealed that it has made provisions of $120 million against the £382 million ($A950 million) Manchester Joint Hospitals project and the group’s shares closed 92 cents or 4.72% lower at $18.58 after the market digested the news.
This is the second UK construction project write-off for Lend Lease in two years. Last year, the group made a $37 million provision against the BBC and Leeds Bridgewater Place projects.
Lend Lease’s chief executive Greg Clarke said first half reported net operating profit after tax in 2007 will be flat compared to the previous corresponding period.
The 2007 first half profit result is expected to be $163 million, down 2.4% on $167 million in 2006.
Clarke said following the problems encountered in the UK construction business with the BBC and Leeds Bridgewater Place projects in 2006, Bob Johnston, chief executive of the global construction business, put in place a new UK management team led by Murray Coleman, former chief executive of Asia Pacific construction. The new team also includes a new CFO and commercial director and senior line management.
Johnston said MJH is a large and complex project that will not be completed until 2010 and the new project team has the skills and track record to deliver this project successfully.
“One of the key issues is that right from the outset we did not fully appreciate the risk and adequately price the project to meet the complex phasing and handover sequence dictated by the trust and user groups,”
Johnston said there were a number of key issues that associated with MJH, including complexity of sequencing 18 stage completions works staged over six years.
“This was further exacerbated by the fact that we are working within a live operating environment and on a brownfield site with uncharted in-ground services and many unknowns. Items like temporary services to keep the hospital operational were underestimated.
“We have also been dealing with a complex client with 44 user groups and more than 2,500 design submissions to be made which, in our view, has added to the inefficiency in the process,” he added.
“The delays incurred in the design phase and the approval process have now had an impact on the balance of the project and acceleration efforts during 2006 have not been sufficient to mitigate the flow-on to later stages.
“The complexity of this project has also caused the Hospitals Trust some heartache in keeping up with the volume of work required to properly respond to the complex design and sequencing issues.
“We are now in discussions with the trust on a number of delay notices that we have issued to them in that regard,” Johnston said.
Whilst MJH is the most significant issue the group has, Lend Lease has also taken into account movements on a handful of other projects in the UK business.
Johnston said besides MJH, the largest component of the other adjustments made relate to Bridgewater Place, which required an additional provision due to a further contractor failure in the latter part of last year causing further delays and costs to the project.
“The project is now close to completion, and we have handed over various parts of the building and expect to be complete by the end of the first quarter… We remain on track to deliver Phase 2 of this project within expectations,”
Johnston said unfortunately, while this is no excuse for the problems encountered, it does go some way to understanding the significant structural shift that took place and the extent to which it has stretched and tested the group’s UK skill base and management teams.
In future, Johnston said the group will only pursue work where the opportunity exists to price risk appropriately.
“Clearly the business has not been consistent on that in the past. We are looking to move the UK business down the risk curve in a number of ways: by increasing the proportion of fee for service work we do; by only undertaking D&C work for select clients; by focusing on servicing the group’s large and growing internal Retail & Communities pipeline.
“The reality is that there are very few organisations capable of delivering the significant pipeline of work in the UK. In contrast with recent years, we are now seeing clients more amenable to procurement models other than fixed price contracts,” he added.
Clarke said despite the Manchester Hospitals’ provision, Lend Lease remains on track to deliver market consensus full year earnings’ expectations PLUSthe added benefit from the win in the Westpac shares tax dispute.
He assured shareholders that the MJH project will be mitigated in the second half by higher than expected distributions from the group’s investment in the Lend Lease Global Fund and a skew of earnings across the company’s core businesses to the second half of the year, including a $32 million after tax payment now due from the Australian Taxation Office.
This payment follows the Federal Court’s finding last December in favour of Lend Lease in the long running Westpac share sale capital gains tax dispute.
Clarke confirmed that Lend Lease expects to achieve a net profit after tax of $399 million for the 2007 full year.
“…we remain comfortable with recent market consensus on operating earnings for the year to June 2007, despite taking the UK construction provision and without relying on the benefit of the payment now due from the ATO.
“Lend Lease has established considerable momentum over the last 12 months, so it is disappointing to have to take up the UK construction provision. It detracts from the great things the group is achieving in terms of growing development backlog, new funds under management and earnings synergies between the core businesses.
“Lend Lease will continue to deliver earnings growth from its core property businesses and will continue to increase the pace at which we harvest value from our maturing property assets to fuel both earnings growth and recycle capital to fund our development pipeline.” Clarke concluded.
“The UK construction business has grown substantially, nearly doubling revenue over the last six years. Our review of the business has shown that this rapid rate of growth, combined with the higher risk work we were undertaking, outgrew our resources to fully manage execution across a number of projects.
“The review clearly points to the need to augment our UK construction skill-set and we are implementing a number of actions to achieve this,” Johnston said.
“All other regions of our global construction business are doing well and are on plan. Despite the UK provision, the global construction business will make a positive contribution to the Group’s earnings for the 2007 financial year,” Johnston said.
Australian Property Journal
