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Leighton ready for a rebound?

Construction company Leighton Holdings (ASX: LEI) and joint venture partner Mirvac Group (ASX: MGR) have been chosen as the preferred builders for the $5.2 billion Perth City Link project. The proposed development will add approximately 1200 apartments and 150,000 sqm of office and retail space north of the Perth CBD. Leighton and Mirvac should account for around $2.1 billion of the total project spend, which will also include the establishment of a number of new urban spaces.

The project will link the CBD with Northbridge, the entertainment precinct to the north of the city, which is currently separated by the city’s train line. Construction of the project is expected to start in 2015 and the contract should be signed in 2014.

Leighton’s share price ended the day up 0.65% at $15.51, slightly up from the company’s mid-year low of $15.38. Incidentally the share price has only been lower twice since 2005; early this year and in mid-2012, and traded above $63 in 2007 prior to the GFC.

There are some Foolish investors who believe Leighton represents excellent value at recent prices, and it’s quite hard to argue based on current stats. Leighton recently reported a 6% increase in revenue, 40% increase in net profit after tax (NPAT), 65% increase in underlying NPAT and $8.7 billion in new contracts in Q3 2013. Compared to 2007 when Leighton’s share price was over $60, NPAT in 2013 is forecast to be over 15% higher, dividend just 4% lower, and earnings per share 10% higher. During 2007 and 2008 Leighton’s price-to-earnings ratio averaged 23, however in 2013 it has averaged just 10.

Indeed all of these factors point to the company being good value at the current share price, however recent negative media attention and higher than expected debt load appears to be holding back the share price. Gearing rose from 36% to 39% in the third quarter, above the company’s traditional levels and well above the group’s targeted range of 25%-35% for the end of 2013.

So is it a buy?

It’s pretty hard to tell. To this Foolish investor’s eye Leighton still represents a high risk, but potentially high return investment. The group has over $42 billion in work-in-hand, which spreads the risk of a single project damaging the profit guidance, but also makes it difficult to assess with any great detail how each project is travelling. No doubt the company will continue to be a major player in construction in Australia and abroad, but only when it can consistently show profits from major projects will investors dive back in. Competitors Lend Lease (ASX: LLC) and Downer EDI (ASX: DOW) are the preferred exposure of some analysts to the sector.

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned.

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