Company Overview: LendLease Group is an integrated international property and infrastructure company. The Company consists of Lend Lease Corporation Limited and its controlled entities, including Lend Lease Trust. Its segments include Property Development, Infrastructure Development, Construction and Investment Management. It is engaged in designing, developing, constructing, funding, owning, co-investing in, operating and managing property and infrastructure assets. The Property Development business involves the development of inner and outer urban developments, apartments, commercial offices, retail centers, healthcare facilities and retirement villages. The Infrastructure Development business arranges, manages and invests in public private partnership projects. The Construction business involves project management, building, engineering and construction services. The Investment Management business involves property and infrastructure investment management, property management and asset management.


LLC Details

Development and Investments Segments Supported LLC in FY 2018: LendLease Group (ASX: LLC) is a mid-cap real estate company with the market capitalization of circa $7.55 Bn as of 14 February 2019. The group operates through three main business divisions, namely, Development, Construction, and Investments. The company sales have grown at CAGR of 4.4% during FY14-18 on the back of the diversified business model. In FY18, the company posted decent performance as it generated Profit after tax or PAT amounting to $792.8 million implying the rise of 4.5% on the YoY basis. Its earnings per security stood at 136.1 cents reflecting YoY rise of 4.6% while the return on equity or ROE stood at 12.7% which happens to be within its target range of 10%-14%. On the business segmental front, the company’s stellar performance in development and investments divisions offset the underperformance which was witnessed in the construction segment. The development division’s result was supported by the robust residential as well as commercial development contributions in Australia and Europe. LendLease Group’s investments division was aided by a rise in the recurring earnings as well as robust gains in the underlying investment asset values. Talking about the margins, the company’s net margin in FY 2018 stood at 4.8% which reflects the rise of 0.2% on the YoY basis implying the company’s increased capability to convert the top line into the bottom line. From the liquidity standpoint, the company’s position has improved significantly in FY 2018 placing it in a strong position to satisfy the short-term commitments which might arise as its current ratio stood at 0.96x reflecting an improvement of 64.7% on the YoY basis. We expect that LendLease Group’s improved net margins, healthy liquidity position, and decent ROE might gain traction of the market participants moving forward. Historically, the stock has been trading at five-year average P/E of ~12.2x, but it traded at 9.83x of FY18 which makes it below the historical average.  On the other hand, the Group’s urbanization pipeline has grown from an end development value of $16 billion to $56 billion since 2011. This has been achieved by its highly disciplined and robust strategic approach towards business objective over the period. Keeping the view of long-term potential in the business and paying dividends consistently with 4.2% dividend yield on five-year average basis, we have valued the stock using 1-year forward P/E market multiple of 12.46x to FY20E consensus EPS of $1.33 and have arrived at a target price upside of about low double-digit (in %).
 
Key Financial Metrics:
 

Source: Company Reports, Thomson Reuters
 
Buy- Back Update: On 21 February 2018, the company announced the on-market buyback of its shares from the market of up to $500 Mn which commenced from 13 March 2018 and continued for one year, ended on 12 March 2019. As at 30 June 2018, LendLease Group had purchased 9,722,400 securities under the on-market buyback for the total consideration of ~A$178 Mn. The reason for the buyback given by the management was its capital management program. As per the management, the on-market buyback is subject to the ongoing assessment of the Group’s surplus capital position, market conditions and growth opportunities.
 
Up to 19 December 2018, the company bought back 2,01,31,011 shares from the market with the total consideration paid as $35,19,18,854 with the highest price paid on 22 June 2018 of $19.92 per share and the lowest price paid on 12 December 2017 of $11.46 per share. On 21 December 2018, the group updated the market about the share cancellation after buy-back wherein it cancelled 19,36,628 shares, at an aggregate cost of $2,36,25,837.
 
Dividend Pay-out Ratio Is Within the Target Range: Over the past five years, LendLease Group has managed to maintain its decent dividend pay-out ratio around 50% which is within the target range of 40% to 60%. Moreover, it has a decent track record of consistent dividend payment with a CAGR of 8.5% over the last four years. The annual dividend yield of the company is about 4.2% on a five-year average basis (FY14-18). In FY18, the Group had declared total dividends amounting to $399.6 million which implies the rise of 3.82% on the YoY basis as in FY 2017 the total dividends amounted to $384.9 million. Moreover, as depicted in the chart, from FY 2015- FY 2018, there has been an upward trend with regards to the dividend payments. We expect that the company will continue to manage its increasing trend in relation to the payment of dividends along with respectable pay-out ratio in years to come which would attract the market participants.
 
 

Decent Dividend Trend (Source: Company Reports)
 
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An Update about Engineering and Services Business: Recently, the Group had made an announcement that they have identified underperformance in financial position with respect to the Engineering and Services Business. As a result, there are expectations that the company would be taking the provision in order of $350 million after tax for 1H2019. The company stated that the underperformance is primarily related to further deterioration with regards to the small number of projects which were identified previously. This was witnessed because of several issues which also includes lower productivity in post tunneling phases of NorthConnex as well as excessive wet weather, access issues and remedial work which is arising from the defective design on other projects.   
 
Robust Performance in Australia and Europe Supported Development Division: LendLease Group’s development division posted EBITDA amounting to $673.2 million which implies the rise of 22% and this division made up 47% of the company’s operating EBITDA. The invested capital encountered a rise of $1.3 billion and stood at $4.3 billion while ROIC (or return on invested capital) stood at 13.4% which happens to be over the target range. The favourable results got supported by the robust performance in Australia with the growth of 11% in the EBITDA to $551.3 million. However, Europe delivered robust contribution with the EBITDA of $110.4 million implying the rise from $68.3 million. The company stated that development pipeline which grew to $71.1 billion, implying an increase of 44% on the YoY basis, has been providing earnings visibility. Along with this, the development pipeline also provides flexibility to be disciplined as well as patient with regards to future opportunities. There are expectations that the diversification by the geography as well as sector would be providing resilience through the market cycles.
 
 
 

Development Division (Source: Company Reports)
 
 
Australian Engineering business Weighed Over Construction Division: LendLease Group’s construction division posted the EBITDA amounting to $78.2 million while in the prior year it was $338.3 million, and this division made up 6% of the company’s operating EBITDA. Even though there was a robust performance of building businesses in each region, the result got impacted by the underperformance of Australian Engineering business. The Australian Construction had delivered EBITDA loss amounting to $23.1 million and was impacted by the weak performance with regards to the Engineering business. The construction division’s outlook happens to be robust with the backlog revenue amounting to $21.1 billion which implies the rise of 2% on the YoY basis. The new work secured amounted to $14.3 billion implying a rise of 8% on the YoY basis as well as above revenue realized of $12.9 billion. The backlog position happens to be well-diversified throughout multiple geographies, sectors as well as clients.
 

Construction Division (Source: Company Reports)
 
Higher Recurring Earnings Supported Investments Division: LendLease Group’s investments division posted the EBITDA amounting to $668.9 million which implies the rise of 35% and this division made up 47% of the company’s operating EBITDA. The results got aided by a rise in recurring earnings as well as robust gains in the underlying investment asset values.
 
 
Investments Division (Source: Company Reports)
 
 
Drivers for Future: LendLease Group had stated that there happens to be higher earnings visibility with a growing pipeline throughout the three operating segments. As mentioned, the development pipeline witnessed the growth of 44% on the YoY basis to $71.1 billion. This also consists $55.9 billion of the urbanization projects following addition of the four major European projects. There are expectations that urbanization projects in the targeted international gateway cities would be accounting for a larger proportion of the earnings moving forward.
 
The company stated that funds under management witnessed a rise of 15% on the YoY basis and stood at $30.1 billion. The development pipeline, which also includes new sectors throughout residential for rent as well as telecommunications infrastructure markets, would be supporting the growth potential in the future. Moreover, operational excellence throughout the platform happens to be the company’s priority and then it would be pursuing via rigorous approach towards the risk management, unwavering commitment towards health, safety as well as sustainability and disciplined approach towards the origination. Moreover, the company has also listed out the target sectors for the future pipeline which included major transport infrastructure, retirement living, and aged care, education, social housing, major urbanization as well as other emerging market spaces.
 
 

Historical PE Band (Source: Company Reports)
 
Stock Recommendation: In the last six months, the stock has fallen 36.69% and is trading at decent PE multiple of 9.77x, indicating undervalued scenario at the current juncture. From the technical perspective, the exponential moving average or EMA has been used and default values were used for the purposes on the daily chart of Lendlease Group. After observation, it was noticed that the stock price has crossed the EMA and had trended in the upward direction which reflects that the stock might witness upward momentum moving forward. Also, the group has announced that they will be announcing the results for the first half of FY19 ending 31 December 2018 via webcast on the 25 February 2019 at 10 A.M. AEDT.
Moreover, the company is expected to be supported by the decent pay-out ratio as well as development pipeline moving forward. Also, the company’s focus towards operational excellence might also act as the key catalyst. Keeping the view of strong capital position, long-term potentiality into the business and consistent dividend payments at 4.2% yield on five-year average basis, we have valued the stock using 1-year forward P/E market multiple of 12.46x to FY20E consensus EPS of $1.33 and have arrived at a target price upside of about low double-digit (in %) in mid to long term. Given the backdrop of aforesaid facts and undervalued scenario at the current juncture, we give a “Buy” recommendation on the stock at the current market price of A$13.330 per share.
 

LLC Daily Chart (Source: Thomson Reuters)

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