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Leighton’s Q3 results: The reason I kept buying shares

The best investments don’t come along too often. But I’ll tell you the two things to look out for: market noise and a good company

Leighton Holdings (ASX: LEI) had ‘noise’ surrounding it but remains a good company. The recent Fairfax Media (ASX: FXJ) allegations of bribery and misconduct were old and already established, so when the share price dropped it was a chance to top up on the stock.

Today’s Q3 results reiterate why it was a sound investment. Here are the key figures, taken from the company’s media release this morning:

  • Revenue of $17.9 billion, up 6% on Q3 2012
  • Net profit after tax (NPAT) of $444 million, up 40% on Q3 2012
  • Underlying NPAT (UNPAT) of $389 million, up 65% on Q3 2012
  • Work in hand of $42.2 billion, down 2% on Q3 2012, up 6% from the first half of 2013
  • $8.7 billion of new contracts, extensions and variations awarded
  • Gearing 39%, up from 36% from the first half of 2013

In addition the company forecasted full year UNPAT of $520 to $600 million, subject to market conditions and/or unfavourable developments.

The company’s biggest concern appears to be its gearing, which it continues to forecast as “within the band of 25-35% at years end, however… currently above where we expected it to be at this stage of the year.” However it could be safe to assume that the worst is behind it.

Despite the ‘noise’ being an opportunity for savvy investors to buy in cheaply, it is having an effect on contract negotiations. “Commercial negotiations with the client in regards to the Gorgon Jetty project are ongoing and recoveries in Iraq have been delayed, in part, due to the damage created by the recent media campaign by the Fairfax Group.”

The Australian reported this week that former Leighton boss, Wal King, is now suing Fairfax for defamation.

The company’s clear focus is to regain shareholders’ trust after a number of large projects, including Victoria’s desalination plant, were overrun with costs. “The rebase element of ‘Stabilise, Rebase and Grow’ remains our key focus, with the reshaping of our operations the priority before we progress to growth.”

Foolish takeaway

Leighton is one of the few companies from the S&P/ASX 200 (ASX: XJO) (^AXJO) that remain well priced for long-term investors. It pays a good dividend and is continuing to win contracts. Based on the upper end of Leighton’s guidance, EPS will jump to over $1.75 (up 31%) and means the company is currently trading for forward earnings of 10. Much lower than many of its other blue-chip counterparts. Leighton remains in this Fool’s portfolio for the long term.

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Motley Fool contributor Owen Raszkiewicz owns shares in Leighton. 

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