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Metro Rail blowout could wipe $90m off Lendlease’s profit

Reports that there may be a $3 billion cost overrun in Melbourne’s Metro Rail project is bad news for the Lendlease Group (ASX: LLC) share price.

A mediator has been called in to help resolve part of the cost dispute between the Lendlease-led Cross Yarra Partnership, which is building the ambitious rail project, and the Victorian state government, according to the Herald Sun.

The amount under mediation is $200 million to $300 million and the analysts at Macquarie Group Ltd (ASX: MQG) estimates that Lendlease could see a $90 million hit if $300 million had to be provisioned for.

Financial impact on Lendlease

The good news is that Macquarie doesn’t think this would be an issue for Lendlease’s balance sheet, reports the Australian Financial Review.

The broker calculated that the provisioning would shave 11 cents off the group’s earnings per share – not a big deal.

However, this assumes no other cost blowouts, but as mentioned earlier, the full blowout could be as high as $3 billion.

But problems could grow

What’s more, Macquarie believes trouble at Metro Rail could make it harder for Lendlease to sell its engineering division. Management is looking to divest the business since issuing a profit downgrade due to unexpected write-downs in the division, which is dragging on the rest of the group’s operations.

Management said at its annual general meeting last week that it received interest in the business from several parties.

Uncertainty over the cost disputes and possible delay to the 2025 project completion date may prompt bidders to have a second think or impact on the amount they might be willing to pay.

Foolish takeaway

We may be in the midst of a so-called infrastructure construction boom but trying to find ways to gain exposure to this thematic can be a tricky affair!

Most engineering contracts are structured in a way where cost blowouts are largely borne by the builders and not the client. Lendlease was seen as one of the better operators in this field but the last profit downgrade tarnished its reputation.

It might be better to better to look at building materials suppliers, although this group isn’t without their problems either. Just look at cement supplier Adelaide Brighton Ltd. (ASX: ABC) and construction materials group Boral Limited (ASX: BLD).

The operators I like in this sector are Downer EDI Limited (ASX: DOW) and James Hardie Industries plc (ASX: JHX).

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Motley Fool contributor Brendon Lau owns shares of Downer EDI Limited, James Hardie Industries plc and Macquarie Group Limited.  Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. 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.

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