Yesterday, Lend Lease (ASX: LLC) reported that it had identified "… certain discrepancies and issues in relation to the reporting and recognition of profits and losses on two projects within the Abigroup operations in Australia."
Abigroup was part of a joint venture project to upgrade 8km of the Ipswich motorway in South East Queensland. The project was successful and the upgrade opened in May 2012, under budget and six months ahead of schedule but it appears that Abigroup's full share of the profits were understated by some unspecified amount.
There is an opposite problem on the $655m Peninsula Link project in Victoria where costs have been understated and Lend Lease now anticipates a loss.
The announcement went on to say that there was no reason to believe that these matters would have a net material impact on the financial year 2012 results or on the outlook for the company. However Lend Lease considered that the matter was serious enough such that the responsible executives at Abigroup will have to stand aside while the matters are investigated and senior Lend Lease personnel are taking direct responsibility for operations and financial oversight until further notice.
Lend Lease is a substantial company with literally hundreds of ongoing projects, some worth billions of dollars and, according to a recent investor's presentation, Abigroup alone had over 62 ongoing projects. It appears that the gain and loss on these two projects cancel each other out so the raw numbers involved wouldn't seem to be too much of a problem. However, the announcement worried the share market since the share price initially fell over 6% and has continued downwards.
Lend Lease Group Chief Executive Officer and Managing Director, Mr Steve McCann, said "We take seriously any potential reporting and compliance issues, and are committed to resolving this matter fully and as quickly as possible."
Lend Lease is a diversified international property and infrastructure group. Last year it delivered a net profit of $504m representing earnings per share of $0.888 and paid unfranked dividends of $0.38. Part of the Lend Lease business is property development and management in a similar fashion to Mirvac (ASX: MGR) or to Australand Property (ASX: ALZ) while its development and construction activities are more akin to Leighton Holdings (ASK: LEI).
Foolish takeaway
Lend Lease undertakes major construction projects with all of the risks these entail and investors are entitled to expect management to control these risks properly without sudden surprises. This announcement might suggest that some weaknesses have crept into the system as the group has expanded and become more complex.
You might believe that this is a one off glitch which is being dealt with and that the pull back in the share price represents an opportunity. Alternatively you might take this as a warning sign that there could be lots of as yet unrecognised problems.
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Motley Fool contributor Tony Reardon does not own any of the shares mentioned in this article. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
