The Lendlease Group (ASX: LLC) share price is down 17% to $14.47 in morning trade following an announcement regarding its Australian Engineering and Services Business.
The company revealed that it has identified additional financial underperformance in its Engineering and Services Business. As a consequence, Lendlease anticipates booking a provision of $350 million after tax for the first half of FY19.
The company attributed the underperformance to further deterioration in a small number of projects that it had previously identified. A number of issues have arisen that has led to the division’s underperformance. These include a decline in productivity in the post tunnelling phases of NorthConnex, an excessive amount of wet weather, access issues and an increase in remedial work due to defective design work on other projects.
Lendlease is undertaking measures to mitigate the anticipated losses that include negotiations with third parties. However, the company is uncertain at this stage on how successful these measures will be in mitigating the underperformance. Furthermore, a comprehensive review of the Engineering and Services Business will also be undertaken.
The fall in Lendlease’s share price this morning has seen it penetrate its previous 52 week low of $15.11 in January. Over the last 12 months, the Lendlease share price has now fallen 13% and has underperformed the broader market’s loss of 2%.
Other property development groups such as Stockland Corporation Ltd (ASX: SGP) and Mirvac Group (ASX: MGR) have also underperformed the broader market with share price falls of 21% and 12% respectively over the last 12 months.
In FY18, Lendlease grew net profit after tax by 5% to 792.8 million and posted earnings per stapled security of $1.36. Before today’s announcement, the consensus expectations for FY19 was for earnings to grow by 9% to $1.48 per stapled security. This morning’s announcement of the $350 million provision the company anticipates to book is likely to materially reduce FY19 net profit.
The market has adjusted its expectations moving forward in morning trade to reflect the impact of the Engineering and Services Business’ underperformance on the overall group’s performance. As a result, investors may want to look elsewhere until the effect of this trading update blows over.
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Motley Fool contributor Tim Katavic has no financial interest in any company mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.