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Lendlease sorry for $350m engineering disappointment

Development giant Lendlease has apologised for the poor performance of its engineering business.

Outgoing Lendlease chairman David Crawford. Picture: Britta Campion
Outgoing Lendlease chairman David Crawford. Picture: Britta Campion

Development giant Lendlease has apologised for the poor performance of its engineering business, which led to a surprise $350 million provision last Friday and prompted investors to wipe more than $2.5 billion from its market capitalisation before its stock recovered in recent days.

At a subdued annual general meeting, departing Lendlease chairman David Crawford said external advisers had been hired to work on a strategic review of the engineering business, which had been marked for a potential sale.

The Australian yesterday revealed that boutique house Gresham, which has close ties with the company, had been tapped to lead the review.

“This will include consideration of structural alternatives for the engineering business, such as retaining the business, demerger or divestment. All options will be considered,” Mr Crawford said.

The chairman did not provide further details but analysts have estimated the unit could be worth about $1 billion, once complex engineering problems are resolved, although there are fears that if problems worsen an exit could be costly.

Lendlease chief executive Steve McCann called the unit’s performance “very disappointing” and said he would forgo any short-term incentives this financial year.

Mr Crawford said the company would attempt to get the troubled engineering unit back on track with the group relying on an operational review being undertaken in parallel by the new head of engineering and building, Hans Dekker.

With the company facing the prospect of a class action from law firm Maurice Blackburn about its disclosure practices, and the board under heightened scrutiny from proxy houses, Mr Crawford told the meeting it had advised the market as soon as possible that there was likely to be a material earnings impact from the underperforming engineering projects.

Mr Crawford, who had been chairman for 15 years, said the board considered the provision it announced “conservative”.

Australian Shareholders’ Association director Allan Goldin quizzed the company on the timing of its disclosures, saying the problems also raised questions about transparency, but the chairman maintained the company had come to market immediately.

The board is backing Mr McCann, with the chairman saying management is taking “the necessary actions” to address problems in engineering.

Lendlease also unveiled changes to its executive reward system, which are tailored to long-dated awards, although this attracted some shareholder opposition.

Mr Crawford said the earnings hit and the share price falls over the past week would “adversely affect” the remuneration of senior executives. But plans to approve the allocation of performance rights to Mr McCann drew a 24 per cent protest vote.

Mr Crawford also defended the timing of the chief executive’s $6m share sale in early September to fund a tax liability.

“The details of these sales of securities have always been disclosed to the market and comply with Lendlease’s securities trading policy,” he said.

Mr McCann also apologised for the “very disappointing” situation and said he accepted responsibility for the problems, which were being addressed. He is set to tough out the storm surrounding the company, saying it is a “great time” for the business overall.

Mr McCann said about 90 per cent of the $350m provision related to three projects.

He highlighted the deterioration of Sydney’s NorthConnex project and two other unidentified projects, but said he was confident the provision reflected the full cost of finishing them.

Lendlease had a “strong” leadership team that could deal with these issues and work on its broader business, he said.

But the company was taking a more conservative approach to new engineering jobs. “We have become more selective and rigorous in our bid strategy and place greater focus on the set-up phase of new projects,” Mr McCann said.

Flagging that problems may be more widespread in a sector with razor-thin margins, Mr McCann said Lendlease was “working closely” with state government agencies and industry bodies on a “more balanced allocation of risk on major projects within the Australian engineering sector”.

The group’s focus on a series of global cities as part of its urbanisation strategy had allowed it to build up a $71.1bn pipeline, he said, and the company’s balance sheet was in a strong position.

Despite the writedowns it may keep buying back stock at the company’s now discounted price. “We have the financial capacity to continue the buyback, subject to market conditions,” he said.

Lendlease shares added 30c to $13.57 as Mr Crawford handed over to incoming chairman, former banker Michael Ullmer, who recommitted to solving the issues in the engineering unit.

Mr McCann noted that residential markets in major Australian cities and London were now well past their cyclical peaks.

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Original URL: https://www.theaustralian.com.au/business/property/lendlease-sorry-for-350m-engineering-disappointment/news-story/2b314c90480e1b164b017c8f2748e406