Lendlease Group

LLC Details

Property Sale for $115.10 Million: Lendlease Group (ASX: LLC) is an integrated infrastructure and property firm with Development, Investment, and Construction as its key operating segments. On 29 September 2021, LLC’s Australian Prime Property Fund Commercial (APPF Commercial) entered an agreement with the RAM Australia Diversified Property Fund (RADPF) to sell an A-grade building at 25 Constitution Avenue, Canberra, for $115.10 million.

Issue of Stapled Securities: On 15 September 2021, LLC issued 221,608 fully paid ordinary shares/units stapled securities at $12.11 under a dividend/distribution plan.

Break Up of Distribution: LLC recently declared that the Lendlease Trust distribution for the six months ended on 30 June 2021 is 4.058 cents per unit and had set 15 September 2021 as the payment date.

Appointment of MD: On 3 September 2021, the Board of LLC appointed Anthony (Tony) Lombardo as the MD and CEO of the company. Previously, Tony was the Global CEO of LLC.

FY21 Highlights:

• Higher Gross Profit: Despite registering a lower top-line of $9,771 million, LLC registered a higher gross profit of $760 million in FY21 versus $473 million in FY20.
• Rise in Statutory NPAT: The company posted an NPAT of $222 million in FY21 compared to a net loss of $310 million in FY20.
• Rise in FUM: The Investments segment reported a 10% YoY increase in funds under management (FUM) to $39.6 billion in FY21. LLC entered $5.1 billion new investment partnerships in FY21 and held ~$2.7 billion of secured FUM.
• FY21 Distributions: The total distribution for FY21 stand at 27 cents per security, a 49% pay-out ratio within the target range of 40-60% of core operating earnings.

Cash & Cash Equivalents Highlights; (Analysis by Kalkine Group)

Key Risks: The company faces the impact of property valuation and climatic changes on the asset portfolio. The ongoing COVID-19 has weakened the demand and adoption of new projects.  The recent news regarding the tightening of lending restrictions by the Council of Financial Regulators, Australia, amidst prevailing low-interest-rate environment, robust housing demand, and rising housing prices, are few potential risks to the consumers and buying momentum in the real estate industry.

Outlook:

• The Group has a $114 billion development pipeline with 23 new projects obtained in the US, the UK, Japan, and Singapore. With this pipeline, LLC expects to generate more than $50 billion of investment-grade product in the future.
• LLC expects cost savings of more than $160 million annualised and realisation benefits from the revised company structure and certain divestments from 2HFY22.
• The Group targets 8-11% of Core Operating ROE by FY24.
• The EBITDA margin of the construction segment is expected within 2 – 3% for FY22 as per the target range. The company has revised its development ROIC to 2 – 5%, compared to the previous target of 10 – 13% (target) in FY22.
• LLC expects the 1HFY22 statutory profit in the in the Development segment to include ~$130-$170 million restructuring charge and $230-$290 million impairment.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of LLC gave a negative return of 8.98% in the past three months and a negative return of 19.27% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $10.370 - $14.890.  The stock has been valued using a Price to Earnings multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount than its peers’ average P/E multiple, considering the decline in revenue, lower cash receipts in FY21, likely impact of restructuring and impairment charges on NPAT in FY22, and the impact of COVID-19 on the Development segment in FY22. For the purpose of valuation, few peers like Eureka Group Holdings Limited (ASX: EGH), Lifestyle Communities Limited (ASX: LIC), PEXA Group Limited (ASX: PXA) have been considered. Considering the current trading levels, new projects in FY21, increase in operating cash flows & bottom-line in FY21, expected restructuring savings and urbanisation development pipeline in FY22, valuation, and key risks associated with the business, we give a ‘Speculative Buy’ rating on the stock at the current market price of $10.430, as on 29 September 2021, 11:58 AM, (GMT+10), Sydney, Eastern Australia.

Investors with a high-risk appetite should evaluate this stock given the technical support and resistance levels and considering the associated risks of COVID-19, forex headwinds, fluctuation in interest rate changes, increased financial regulations, and volatility of property cycles.

LLC Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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