Confidence Rising In Lend Lease’s Earnings Outlook

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By Chris Shaw

Property development group Lend Lease ((LLC)) has announced a conditional implementation agreement with Japanese home builder Sekisui House in relation to Lend Lease's residential development portfolio, a move expected to bring forward some future earnings for the company.

The deal will see Sekisui House take a 50% interest in the Serrata apartment tower in Melbourne and a 50% interest in the Hyatt Coolum resort, along with land for residential development surrounding the resort. The two companies are in discussion over a number of additional potential projects.

According to JP Morgan, the deal will add a material amount to Lend Lease's earnings in FY11, as sale proceeds are likely to be in the range of $100 million. This translates into $20-$30 million in after-tax profits.

Given the deal has not been completed, JP Morgan has not adjusted its earnings estimates for Lend Lease, though the stockbroker notes a finalisation of the agreement would offer additional confidence its forecast for FY11 net profit of $353.7 million can be achieved.

What the deal does achieve, comments Deutsche Bank, is bring forward some future earnings from the Serrata project in particular. On Deutsche's numbers, the agreement would generate a profit of around $25 million, while also releasing around $125 million in capital Lend Lease could then deploy elsewhere.

Currently Deutsche Bank is forecasting FY11 earnings of $390.8 million, though this amount includes around $68 million in capital recycling gains. This amount depends on the profit achieved on disposing of some assets in the UK, but Deutsche suggests if these sales prices were to fall short of expectations, the Sekisui House deal would provide a significant buffer to offset any shortfall.

Other advantages of the dea,l in the view of UBS, are by Lend Lease taking the development management role in some Sekisui House projects in Australia, there is scope for additional fee income in coming years. As well, Sekisui House becomes a strategic partner that could help speed up sales of Lend Lease's Delfin land estates given built products can now be offered.

Given the deal won't be signed until later in FY11 there are no changes to broker earnings forecasts for Lend Lease, though as JP Morgan noted the confidence in these forecasts appears to be strengthening.

JP Morgan is forecasting earnings per share (EPS) for Lend Lease of 62.5c in FY11 and 68.4c in FY12, while UBS expects EPS of 60.7c and 66.5c respectively. Consensus forecasts according to the FNArena database stand at 64.1c in FY11 and 70.1c in FY12.

In the view of BA-Merrill Lynch, earnings risk for Lend Lease is to the upside as the Sekisui House deal should assist in the delivery of major apartment projects and help the Delfin division achieve a step-up in growth.

Given BA-ML forecasts imply Lend Lease is trading on a FY11 earnings multiple of 12.2 times on trough earnings, the stock offers value in the broker's view, so on news of the Sekisui House agreement BA-ML retains its Buy rating.

Most in the market agree, as the FNArena database shows Lend Lease is rated as Buy six times and Hold once, this courtesy of Goldman Sachs. The average price target for Lend Lease is $9.01, unchanged from prior to the announcement of the Sekisui House deal.

Shares in Lend Lease today are unchanged with a last sale price of $7.52 as at 11.05am. Over the past year the stock has traded in a range of $6.70 to $11.29, while the current share price implies upside of 19% to the consensus price target according to the FNArena database.

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