Stock Research - Investor Desk

Investment Thesis:

Engineering and Services Business sale process is underway – this removes one downside risk to the stock.
Balance sheet remains in solid position and even with the latest provision the Company has headroom available and is within its banking covenants. However, gearing is expected to rise to ~20% as development ramps up to FY23.
Robust development outlook with demand for both commercial and residential especially with strong level of apartment pre-sales.
Outlook for new infrastructure projects to be tendered in Australia in the next 2 years remains attractive.
New management team will likely bring a fresh perspective and strategy.
Proposed cost out program of $160m should be supported by earnings in a tough trading environment.
Valuation appears undemanding.

Key Risks:

Further provisions to the existing problem projects.
New projects are mispriced from a risk perspective.
Cut to dividends.
Sudden increases in interest rates.
Increase in apartments default rate.
Any delays or execution problems in development and construction that sees margin being affected.
Any net outflows from its investment management business.

Key Highlights:

Core operating earnings to improve from 2H22.
FY22 returns for core operating segments revised with Investments ROIC of 7.5-8.5% (vs previous estimate of 5- 8%), Development ROIC of 2-4% (vs previous estimate of 2-5%), driven by $2bn of completions including significantly improved settlement volumes in Australian Communities and more than $4bn of commencements, and Construction EBITDA margin of 2-3% (unchanged from previous estimate) amid improved productivity as Covid-19 restrictions ease.
Group ROE target of 8-11% to be achieved by FY24.
FUM to grow >66.7% to >$70bn by FY26 as investments platform is upscaled via the launch of new funds.
Core operating earnings to improve from 2H22.
FY22 returns for core operating segments revised with Investments ROIC of 7.5-8.5% (vs previous estimate of 5- 8%), Development ROIC of 2-4% (vs previous estimate of 2-5%), driven by $2bn of completions including significantly improved settlement volumes in Australian Communities and more than $4bn of commencements, and Construction EBITDA margin of 2-3% (unchanged from previous estimate) amid improved productivity as Covid-19 restrictions ease.
Group ROE target of 8-11% to be achieved by FY24.
FUM to grow >66.7% to >$70bn by FY26 as investments platform is upscaled via the launch of new funds.
Development completion target of >$8bn p.a., along with the ROIC of 10-13% by FY24.
Financial position. Liquidity position remained strong with $842m of cash and cash equivalents (down -49% over 2H21 primarily due to underlying operating cash outflow of $388m, reflecting the challenging operating conditions in conjunction with reduced new business activity) and $2.2bn in available undrawn debt, to support $112bn development pipeline.
Net debt increased +144% over pcp to $1.7bn, leading to gearing increasing +700bps to 12%, remaining within the target range of 10-20%.
Investment grade credit rating of Baa3/BBB- and stable outlook by Moody/Fitch.
Continues to assess redeployment opportunities in the Investment segment. The Company sold 28% stake in the future asset management income stream from the US Military Housing portfolio for $170m on a multiple of 26x FY23 estimated NPAT, which is expected to contribute ~$110m to NPAT in 2H22, leading to management upgrading FY22 Investment ROIC outlook. Management continues to further assess redeployment opportunities within the Investments segment and is considering the divestment of a further 25% interest in the Retirement Living business.

Company Description:

Lend Lease Corporation (LLC) is a global property developer with three key segments in (1) Development: involves development of communities, inner city mixed use developments, apartments, retirement, retail, commercial assets and social infrastructure (with earnings derived from development margins, development management fees received from external co-investors and origination fees for infrastructure PPPs) (2) Construction: involves project management, design, and construction service, predominately in infrastructure, defence, mixed use, commercial and residential sectors (with earnings derived from project and construction management fees and construction margin); and (3) Investments: involves wholesale investment management platform, LLC’s interests in property and infrastructure co-investments, Retirement and US military housing (with earnings derived from funds management fees as well as capital growth and yield from co-investments and returns from LLC’s retirement portfolio and US military housing business). LLC operates predominately in Australia, but also in the UK and US and with a smaller contribution to earnings derived from the Asia Pacific.

(Source: Banyantree)

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