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Why Leighton Holdings Limited’s share price gained 23%

Construction services firm Leighton Holdings Limited (ASX: LEI) has seen its share price soar 23%, far outperforming the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) which has gained just 1.8%. Leighton’s strong gains are largely thanks to a proportional takeover offer from major shareholder Hochtief who bid $22.50 per share to purchase 37.5% of each shareholders stake.

After initially soaring from the average pre-bid price of $16.66 (based on the previous 3 months), the share price has now settled back below $20. The question investors must now ask themselves is whether they should stick around in this less liquid investment that is majority controlled by Hochtief or if it is time to move on?

Recently management provided an update on how Leighton had performed in the first quarter (it operates on a calendar year basis) and reaffirmed guidance for the full year. Revenues for the quarter were up 7% to $5.7 billion and underlying net profit after tax jumped 29% to $159 million.

With work in hand currently at a massive $41 billion, management reiterated guidance for a full year underlying NPAT of between $540 million and $620 million.

With a market capitalisation of $6.7 billion, if Leighton can achieve the high end of its profit guidance then the pricing of Leighton’s stock starts to look appealing.

The worry for investors is that the headwinds facing the construction sector could see profit comes in at the low end of the range of guidance.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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