I started by fixing the timing - which is when I noticed the threads for the tensioner bolts have been partially stripped out. This, along with the incorrect timing, had me beginning to suspect that the work previously carried out on the engine was not done to a very high standard.
Initially Cylinder #1 tested fine, #2, #3 and #4 all tested leak free too. Great news! Until I decided to retest #1... For some reason cylinder #1 was now reading a major leak and to confuse things further the leak was from the exhaust side. I wondered if somehow an exhaust valve had got bent during the leakdown testing process but was skeptical since the engine had only been turned over by hand. In pulling the sparkplugs for the test I discovered more signs that the engine had been poorly maintained. Each sparkplug was oil soaked and one came out totally fouled with lumps of burnt oil stuck to it. Looking into the sparkplug wells and around the valve cover it became obvious that whoever sealed the cover had done so incredibly poorly. The gasket had been caked in silicone sealant to the point where it was poking through into the plug wells. I have no doubt oil had been leaking into the wells and being burnt by the sparkplugs.
As for fixing the leaking #1 cylinder, I really wanted to avoid removing the head so firstly I filled the engine with oil as it had been shipped to me dry. I wondered if the lack of oil was preventing the hydraulic valve adjustment from working so cycled the engine a few times and tested again but with no change. I then decided to remove the valve cover to make sure everything was moving freely. This is where I discovered massive chunks of burnt oil stuck to the oil passages in the head - more evidence of a poorly maintained motor. I picked out what I could with a pair of tweezers and blew some smaller bits out with an air compressor. I also blew out the inside of the #1 cylinder and into the exhaust ports too. Testing with the leakdown tester now finally gave me a solid reading. I'm assuming that in turning the engine over to test the other cylinder a small piece of burnt oil had become lodged around the exhaust valve preventing it from sealing correctly.
Fortunately, it seems one tooth out on the intake side is not enough to cause the pistons to contact the valves. Possibly because the vvti is able to retard the timing about that much during standard operation anyway. Now that I'm happy the engine is able to hold compression, I can move into cleaning everything down. Seeing the state of the inside of the head I will definitely be running some engine flush through with probably an extra filter change to try to get as much as the crud out of the engine before and serious use.