After completing a major review of its operations and asset base which has resulted in a revision of the profit forecast for the 2010/11 financial year, Leighton Holdings Ltd (ASX: LEI) says the group now expects to report a loss of $427 million for the financial year versus its previous guidance for a profit of $480 million after tax.

The revision is primarily due to write-backs of expected profit on the Airport Link project in Queensland and the Victorian Desalination Project, and an impairment of Leighton’s investment in the Habtoor Leighton Group (HLG).

Chief Executive, Mr David Stewart, said this was an extremely disappointing result but that it was important to address these issues so that investors could have confidence about the future.

“We are acting decisively to deal with write-backs on these two problem projects and with the investment in the Middle East. While it is very frustrating to have to deal with the financial consequences, it does now leave Leighton well positioned to return to more normalised growth and earnings in 2011/12 and beyond,” said Mr Stewart.

“On the Airport Link Project in Brisbane, the Thiess John Holland joint venture has continued to encounter design, access, weather, engineering, planning and coordination difficulties that have delayed the works and increased the forecast costs to complete the project.

“Ground conditions in some areas have proved more difficult and variable than anticipated.
Acceleration measures and prolongation costs required to overcome project delays resulted in major increases to the forecast final cost,” said Mr Stewart.

“These extra costs mean that the project is forecast to make a pre-tax loss of approximately $430 million. This revised forecast is our best estimate of the financial outcome of the project and includes contingencies which may be required to achieve our completion schedule.

“At the Victorian Desalination Project, being built at Wonthaggi in Victoria, wet and windy weather has continued and is expected to impact the delivery of the first water which was originally scheduled for 10 November 2011. However the full takeover of the plant at mid 2012 remains the target. Overall the project is progressing well with the inlet and outlet tunnelling largely complete, as is the 84 kilometre water pipeline to Cardinia Reservoir and the High Voltage Electric line,” said Mr Stewart.

“However, poor productivity and the inclement weather have all impacted the construction on the site and, in particular, the reverse osmosis plant. This may trigger a one off $15m penalty and extra costs which have been included in our revised forecast.

“Normally we would not review the carrying value of HLG until June but due to deteriorating cashflow from legacy projects and the requirement for the injection of AED1 billion in additionalshareholder loans, we believe it prudent to review the carrying value of HLG. Conditions for our business in the Middle East are still proving to be volatile, recovery of receivables has not improved and the winning of new projects remains slow,” said Mr Stewart.

On the company's outlook, Mr Stewart said the Leighton Group is in solid shape with most of its major markets – particularly Australian infrastructure and resources, and the bulk of Asia – proving very positive.

"Our estimate of work in hand at the end of March is a record $46 billion which has a strong level of inherent profitability,” said Mr Stewart.

“Since December 2010, we have been awarded an additional $4.2 billion in new work and the Group currently has a strong level of preferred positions.