Leighton Holdings Ltd. (LEI), the Australian builder controlled by Hochtief AG, borrowed money to lift its dividend 27 percent as Executive Chairman Marcelino Fernandez Verdes switches from investing to paying shareholders.
The first-half interim dividend was raised to 57 Australian cents a share, according to a regulatory filing today, resulting in Hochtief receiving about A$134 million ($126 million) for its 70 percent stake. Net income in the six months to June 30 was A$291 million, down 20 percent from the A$366 million reported a year earlier, and ahead of the A$271 million median of five analyst estimates surveyed by Bloomberg.
The result shows Fernandez Verdes’ willingness to reward shareholders including Hochtief as Australia’s largest builder weathers a slowdown in mining and energy work. Fernandez Verdes, who’s also chief executive of Hochtief and took over Leighton’s top jobs in boardroom shuffles this year, is cutting capital spending and considering the sale of its property and services businesses and the John Holland unit that built Australia’s parliament.
“Dividends have been paid from borrowings,” Nicholas Robison, an analyst at Morgan Stanley in Sydney, wrote in a note to clients today. “The sustainability of reported profits” is questionable, given negative operating cash flows.
Leighton shares fell as much as 4.1 percent and closed 2.4 percent lower at A$22.10, the biggest drop since May 14. The S&P/ASX 200 index slipped 0.1 percent.
The company reported negative operating cash flow of A$37.1 million in the period.
Standard & Poor’s this month removed Leighton from a negative credit watch, which was imposed in March over concerns the company would be run for the benefit of shareholders in Hochtief and Actividades de Construccion & Servicios SA or ACS, which in turn controls the German company. That’s still an issue that needs watching, Melbourne-based analyst May Zhong wrote.
“Our assessment of the weaker credit quality of Grupo ACS will continue to be an important driver of our view on Leighton’s creditworthiness,” she wrote July 14.
Fernandez Verdes is trying to streamline a business with A$38 billion of projects in hand. The company is “having discussions with potential investors” in its services, property and John Holland units and a final decision is yet to be made, Leighton said today in a statement. Cash from the sales will be used to reduce indebtedness.
John Holland and the property business together account for about 18 percent of work in hand and services businesses, which overlap with those units, make up 14 percent, according to the statement.
“It’s a good solid result, but the real issue is what happens when Leighton gets the money from the sale of John Holland,” Ross McMillan, an analyst at Morningstar Inc. in Sydney, said by phone. “Two years out you could see Hochtief move to 100 percent ownership.”
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