Lendlease Dozes at Digger as Engineering Impairments Skyrocket. FVE Cut to AUD 17.20

A year ago, Lendlease flagged AUD 200 million of post-tax losses in relation to problems on what is believed to be four Australian engineering projects. These losses have now increased by a further AUD 350 million, pointing to inadequate systems over project management, risk management, and quality control. The additional post-tax losses equate to AUD 0.62 per share and an estimated AUD 0.82 per share on a pretax basis. Adjusting for these and an anticipated pull back in the level of engineering work the firm undertakes going forward in Australia reduces our fair value estimate to AUD 17.20 from AUD 18.50. The losses on the engineering projects are definitely negative news for Lendlease, but we think the market has over-reacted, shaving approximately 20% or AUD 1.8 billion off Lendlease's market capitalisation.