Leighton – just a Fairfax “beat up”

Co-founder of the Switzer Report
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Back on 19 August, when Leighton’s was trading at $16.52, we wrote:

“The Company is making some good progress on its (fairly simple) strategy and can demonstrate an improvement in margin. Noting the risks about the collection of the underclaims and other difficult projects, the PE and yield numbers speak for themselves. It is really a question about whether you can back management’s guidance about UPAT and gearing. In the higher risk category, however within a diversified portfolio, buy for yield.”

Leighton’s subsequently rallied to touch $20.00 on 13 September. You can read our full report here.

The Fairfax allegations

The Fairfax allegations around bribery and corruption in their International division are interesting and make for good copy – but they relate to events in 2010 and 2011. While they are not old news, it is hard to see how they really reflect on what is going on at Leighton’s at the moment. It is all about ‘former’ executives and ‘former’ governance issues – this and the amount of pages devoted to the story is what makes it a “beat up” by Fairfax.

What is the risk for Leighton’s shareholders? Well, perhaps one of the potential lawsuits by other aggrieved shareholders may be successful, and/or management time is consumed in defending these claims and other resultant issues, rather than focusing on making money for shareholders. Probable, but my sense is that this story is likely to fade away and any losses won’t be that material.

And the market reaction? The move down was severe and rapid – no doubt pushed harder by the hedge funds going short. The latest ASIC figures show a jump in short positions, from 4.70% the week before to 5.86% on Friday, before falling back to 5.15% today. They will cover just as quickly as the price moves back up.

Bottom line – with the same caveats as last time, within a diversified portfolio, buy for yield.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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