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Leighton to cut costs

Shareholders in Leighton Holdings (ASX: LEI) have today breathed a sigh of relief as deputy chief executive Peter Gregg told investors that cost cutting will become a primary objective for the company as the mining contractor sector begins to deteriorate.

This year, the resources industry has lost 9.5% in comparison to the S&P/ASX 200’s (Index: ^AXJO) (ASX: XJO) 11.3% gain, highlighting the deterioration. As a result, mining giant BHP Billiton (ASX: BHP) has been attempting to rid themselves of unnecessary costs, which saw the services of Leighton Contractors – one of Leighton’s subdivisions – replaced by another cheaper company for one of its coal mines in Queensland.

Last week, others in the industry, including UGL (ASX: UGL) and WorleyParsons (ASX: WOR), released profit downgrades, warning that they will not be able to meet profit expectations for the year. Fearing that Leighton may follow down the same path, investors traded the company’s stocks down by 10% to finish last week valued at just $18.01.

The shares have today recovered over 4% as Gregg reassured investors that the company had budgetary plans to ensure margins were maintained.

Recognising the “stress” currently being endured in the mining contractor sector, Gregg has conceded that business strategies now need to be altered. Whilst the industry has soared over the past decade, Gregg stated that “now it’s not all about growth”. Instead, the company will focus on reducing overhead costs and lowering net debt with the aim of maintaining margins and earnings – seeing this as an opportunity to “redefine how we do things and maintain the margin”.

Although some have argued that the mining boom isn’t over yet, there have certainly been signs of it slowing down. After the company’s gearing increased from 35% to 48% in the quarter ending 31 March, management have labeled the debt situation as unacceptable, and highlighted the need to strengthen the balance sheet.

According to The Australian Financial Review, Leighton is expected to reiterate its guidance of between $520-600 million for full year underlying net profit. Furthermore, following a string of resignations from the board in recent months, the company expects that vacancies will be filled by the end of June.

Foolish takeaway

What will assist Leighton in the future is its diversification. Operating in 20 countries, the company provides various services to the infrastructure, resources and property markets. Whilst Gregg admits that the company is certainly not immune to the deteriorating sector, they are better positioned than those purely exposed to the Australian resources market.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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