Interview Transcript

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Leighton Holdings Limited earlier this year said it aspired to have work in hand of A$50 billion, revenue of A$29 billion and NPAT of A$900 million in five years. This compares with work in hand of A$37.5 billion as at the end of March 2010 and expected revenue and NPAT of A$18.5 billion and A$600 million respectively in the current year ending 30 June 2010. Do these targets remain achievable given the recent slowing in work particularly in your Middle East markets, and can the growth be achieved organically? Do you still maintain your guidance of net profit after tax in FY 2010 of A$600 million?

CEO Wal King

The further into the future you go, the increasing uncertainty you get in relation to work in hand expectations. Despite this, we recently had a strategy meeting in Hong Kong and we believe the aspirational targets of A$29 billion revenue, A$900 million profit after tax and A$50 billion work at hand are achievable. These are not forecasts, they are aspirational targets. We previously announced that we would be in excess of A$600 million of profit after tax for FY2010 and that is where we still sit. We’re still dealing with post GFC issues but, in the main, we are in the right part of the world with the right opportunities in front of us.

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As at the end of December 2009, Leighton had net debt of A$685 million, up from A$613 million six months earlier. Gearing was 29 percent, up from 26 percent, and you also had $1.6 billion of undrawn facilities and guarantees. Is the current balance sheet adequate to support your growth targets? What is the outlook for debt and gearing levels as at 30 June 2010?

CEO Wal King

Our balance sheet remains exceptionally strong with gearing around 43% which takes into account the off balance sheet structures and we believe that’s quite a strong position to be in. In fact, Moody's Investors Service today affirmed Leighton Holdings Limited's Baa1 issuer rating and the outlook on the rating has been revised to stable from negative. Moody’s said the Baa1 rating reflects, amongst other things, the Group's modest usage of debt funding with sound cash reserves underpinning liquidity.

We are confident in our balance sheet strength and, looking forward, our aspirational growth targets can be funded from our retained earnings. The A$1.6 billion of undrawn facilities includes A$670 million of syndicated performance bond facilities put in place at the end of 2009. The business has since utilized some of these facilities but we currently have sufficient head room and capacity to fund everything that we need.

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Given Leighton’s continuing high levels of exposure to resources contracts, which are relatively capital intense, what level of annual capex will be required to reach your targets?

CEO Wal King

Our capital expenditure programs run in conjunction with the way we finance the business. Capital expenditure will be approximately A$600 million this year and based on our forward forecasts, rise to about A$1 billion next year. There are some black clouds around at the moment in terms of the “super tax”, but we expect our existing projects to continue. We’re currently negotiating some A$2-3 billion worth of mining projects that should come across the line in the next few weeks and we can manage the capex for these.

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Moving on to Asia, Leighton has continued to win mining work in Asia, especially Indonesia and Mongolia, where do you see these markets going?

CEO Wal King

Leighton Asia’s offshore mining activities are primarily focused on Indonesia and Mongolia. We’re very optimistic about the mining work in these countries. They are very low cost environments, particularly in Mongolia. So, provided China and the rest of the world continue to need resources, which we believe they will, we’re in a great position to support the expansion of the mining industries in Mongolia and Indonesia.

Mongolia is a fantastic opportunity for us. We now have A$2 billion worth of work there with the potential for that to increase over the period ahead by at least another billion dollars. For example, we recently secured a A$273 million, six-year contract to develop and operate Mongolia Energy Corporation's Khushuut coal mine in western Mongolia. This is expected to eventually result in up to five to six million tonnes of coking and thermal coal production each year, after it ramps up. Mongolia has a huge amount of untapped resources, and is dependent on the rate at which they can sell both thermal coal and coking coal to either China or Russia.

In Indonesia, Leighton Asia was recently awarded a A$1.1 billion contract for the expansion of the mining services at the MSJ coal mine in Indonesia. This is on top of the work we already had. The contract takes Leighton Asia’s work in hand to record levels of over A$7 billion.

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How are Leighton’s operations going in Hong Kong and Macau and how do operations compare to other Asian markets?

CEO Wal King

Hong Kong has an infrastructure program of staggering proportions. It includes road, rail, water, waste infrastructure programs and a new bridge across to Macau. The Hong Kong business will continue to present many opportunities for us. Leighton is probably number two or three as a general contractor in the Hong Kong environment.

In Macau, following the successful completion of his first casino and resort by Leighton Asia, Steve Wynn recently said that he would probably be ready to break ground next year on his first Cotai property and finish construction by 2014. This casino project is likely to be worth in excess of US$2 billion and Mr Wynn has indicated that the Leighton Asia-China State joint venture would be used again.

Each of the markets in Asia is fundamentally different but we are very strong in Hong Kong, Mongolia and Indonesia. In other markets, we remain more opportunistic in terms of securing mining or infrastructure work that comes along.

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What are the opportunities you’re expecting in India and how do they relate to the sales negotiations that have been reported in the press to be taking place with Jindal? What are the other opportunities in the region?

CEO Wal King

The Leighton India business has two big things happening at the moment. First is the part sale of the business to Jindal and second is the strong likelihood of a major tunnel contract.

We have signed a term sheet with the Indian company Jindal to sell 26% of our Indian business to them. Jindal are a large industrial group and steel producer. They are the third largest steel producer in India with a capacity of about 8 million tonnes a year. They also have a large list of development projects that include hydraulic, power distribution and mining work. We believe bringing Jindal in as a partner bodes well for our business. Bringing in a strategic partner provides the additional support of a well known local group who can open doors for us and also an expanded pipeline of work. This is very important in taking the Indian business to the next stage of its development.

Sales terms have been agreed in principal and we expect to have a final sign off in a number of weeks. In addition to the Jindal deal, we are in the final stages of negotiations for a major tunnel contract. We’re very confident of winning the contract and expect to have final sign off in early July. It’s a 9km tunnel worth around $US500 million in the North West region of India.

Also in the Asian environment, we have our off-shore oil and gas business. We are in the final stages of negotiating a major job in the northern part of the Persian Gulf for $US700 million. The job comprises about 120 km of pipeline and three single point moorings and is expected to be awarded in early-to-mid July.

The Leighton International business has a good balance between the off-shore business in places like the Gulf and infrastructure and building projects like the major tunnel contract in India. The new projects that I mentioned equate to about $US1.2 billion worth of work that we expect to have wrapped up by mid July.

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In the nine months to March 2010, solid performances by Leighton’s mining and infrastructure businesses offset weaker results from the Middle East, particularly Dubai. When do you expect your Dubai operations to return to growth and what further risks do you face in the Middle East given your exposure to the region?

CEO Wal King

Our perception of the Middle East, in particular Dubai, is that it has gone through the worst and some degree of calm has returned. Everyone is aware that there are issues in the Middle East and we are making progress in working through them. Dubai’s property bubble collapse is well known. The city has some level of activity but remains fairly subdued.

In Dubai we are working under an interim agreement on a project in the Dubai International Finance Centre and expect to be awarded a 700 million dirham (approx A$230 million) contract to finish the project off. The project was started by the Saudi contractor, Saudi Oger, but they’ve been terminated. Apart from various other opportunities, we’re also one of two bidders on a billion dirham children’s hospital in Dubai.

The overall business in Dubai remains difficult but it is no longer our major or only market in the region. While a level of outstanding money is owed to us, we are negotiating recovery payments from some of the major outstanding debtors. We also believe that we have an adequate level of provisioning against any non payments. It remains challenging but we are committed to the Middle East. There is a continuing flow of work and we will work our way through any problems there. In the longer term we see the Middle East as a growing and important market for the Group.

Abu Dhabi and markets outside the UAE provide good opportunities for construction work. In the UAE, Abu Dhabi continues to be our largest market. Major jobs under bid there include a 4 billion dirham hospital and a new presidential palace worth approximately 2.5 billion dirham. There are also major transport and social infrastructure projects on offer over the next 12-18 months including rail, roads and the expansion of Abu Dhabi airport. There is also a continuing stream of work to be bid on at Saadiyat Island including the Louvre and Guggenheim Museums, and we’re finishing off the Sorbonne and Zayed Universities. Those two projects have a combined value of some 4.2 billion dirham. Our piling company is also close to securing a 100 million dirham contract for the foundations on the Louvre museum.

Qatar provides continuing opportunities. We continue to make good progress on the Equestrian Centre in Doha and are short listed for work on the construction of a people mover at Education City. We also recently submitted bids for the 4 billion riyal Doha Port where we are one of the technically qualified bidders. Apart from this, there’s also an 800 million riyal (approx A$250 million) shopping centre in Doha, and a multi-billion dollar metro system on the drawing board.

Elsewhere, in Kuwait, there’s a large program in relation to airport construction and also a large causeway. Saudi Arabia remains a massive construction market with significant potential. We have one project there and were recently involved in discussions with some potential local partners to form a joint venture company.

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Do you foresee any need for write-downs relating to your investment in the Middle East or any of your other investments?

CEO Wal King

We don’t foresee any write-downs. It’s a moving target in terms of our confidence in the Middle East business albeit we believe that the worst is over in terms of a general collapse of market confidence in the Middle East. We believe that over the next 12 months we will secure sufficient new work to underwrite the business and its carrying value and we are comfortable with our position at this point.

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Can you comment on the current level of debt and gearing within your Middle East based associate Al Habtoor Leighton Group? What has been the trend in the joint venture’s receivables outstanding and does it have adequate working capital for the near term without recourse to a capital injection from its owners?

CEO Wal King

We don’t disclose the capital structure because we have partners and it’s not for us to disclose alone. Bear in mind as well that we don’t disclose the debt structure or receivables on our other associates or related entities. But in terms of working capital requirements, the Al Habtoor Leighton Group had in place a relatively small working capital facility and borrowed an additional 500 million dirhams (around A$135 million) to provide extra working capital facilities earlier in the year. We believe that the company has an adequate balance sheet structure to support its operations and both shareholders remain committed to the Al Habtoor Leighton Group and will support it through this challenging period. The future funding requirements for the business will depend largely on how quickly we collect the outstanding debtors and secure new works.

At the Leighton Holdings level, we have refinanced the LMENA loan of US$368 million which was put in place to fund the original acquisition. The refinancing was done at lower rates with full recourse to Leighton Holdings.

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Turning back to Australia and given your exposure to contract mining, what is the expected impact on Leighton of the Australian government’s proposed “resources super profits tax? “ Would implementation of the RSPT affect your short to medium term growth strategy? What is the outlook for contract mining and what are the expectations for the other markets Leighton is exposed to in Australia?

CEO Wal King

The resource business is separated into existing projects and new projects. Existing projects, where money has been sunk and the operation set-up, will continue on. For example, by the end of July, we expect to finalise about A$2.5-3 billion worth of mining contracts and extensions.

The black cloud hanging over the resource business is the super tax, and no one knows the answer of what will happen there. If the Government maintains their line, then a number of projects will not go ahead in Australia. Notwithstanding the RSPT, Australia remains in an excellent position to continue supplying resources to fuel the future growth of the world.

The other positive for Leighton is that we’ll take the opportunity to invest overseas to support our clients in Indonesia, Mongolia or other parts of the world where we operate our contract mining business. We’re potentially looking at establishing a mining business in Africa because we believe a number of projects will go there. We hope common sense will prevail and that the super tax will be modified to some extent. If it’s not modified, it is an unthinkable situation that brings in a great cloud of uncertainty and investment risk. It runs completely across the concept of Australia being a very stable place to invest in.

In other markets, while the property market remains weak the fundamentals of the infrastructure market are solid, with many opportunities coming forward. We recently announced another major road project, Victoria’s M80 Ring Road Upgrade, between the Calder Freeway and Sydney Road, with the contract finalised at A$623 million. In addition to this, we are the preferred bidder in Australia on probably $2-3 billion worth of other projects around the place. The long term outlook for transport, energy and utilities infrastructure remains positive and we see significant levels of spending being undertaken by Government, both States and Federal, over a number of years.

The Leighton Group has a terrific market position, the outlook is positive and we are well positioned to take advantage of the many opportunities that are being presented in most sectors of our business.

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Thank you Wal.
 

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  Leighton Holdings Limited (LEI)

  CFO on Outlook

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