Barangaroo Remains The Key Catalyst For Lend Lease

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 – Lend Lease interim generally better than expected
 – Valemus acquisition continues to deliver
 – Uncertain economic outlook impacting on some projects
 – Brokers continue to see value at current levels

By Chris Shaw

Interim earnings from Lend Lease ((LLC)) were in general a little better than the market had expected, though on a divisional basis earnings were somewhat mixed. Construction in Australia in particular was strong, helped by the recent Valemus acquisition, while most of the other divisions delivered lower earnings for the period.

Overall, net profit after tax of $220.8 million beat the market consensus forecast of a result of around $196 million, while UBS notes balance sheet metrics also improved during the period. Gearing has fallen to 3.4%, while liquidity to fund developments stands at $2.4 billion and operating cash inflow for the half year was positive to the tune of $208 million.

As JP Morgan points out, uncertain economic conditions continue to make it difficult to get an accurate handle on future earnings expectations for Lend Lease. As evidence of this, management has not offered guidance for full year earnings.

But in the view of JP Morgan, Valemus remains on track to generate 15% earnings per share (EPS) accretion this year. There is extra upside for group earnings in the medium-term from Lend Lease's mixed-use development pipeline.

The big negative at present is ongoing delays at the Barangaroo South development, where UBS notes it is taking longer than expected for Lend Lease to secure capital partners and tenants. While the broker remains confident in the project and expects major tenants will eventually move, deterioration in global markets have extended the time-frame for this to occur.

The signing of tenants and third party capital being invested at Barangaroo is likely to be a key catalyst for the Lend Lease share price in JP Morgan's view, the difficulty is the uncertainty in relation to the timing of any such announcements.

On the plus side for the mixed-use development pipeline, JP Morgan notes good progress continues to be made at the RNA Showgrounds site in Brisbane and at JEM in Singapore. JP Morgan sees a number of opportunities for all of Lend Lease's divisions over the medium-term.

Post Lend Lease's interim result, brokers have made some changes to earnings forecasts and as a result price targets. Overall the changes are modest, as the consensus price target according to the FNArena database has moved to $9.67, down slightly from $9.76 prior to the result.

Opinions on Lend Lease remain almost universally favourable, the database showing the stock is rated Buy six times and Hold once. The latter comes courtesy of BA Merrill Lynch, who takes the view delivering on a return on equity target of 15% now looks more difficult given the uncertain medium-term economic outlook.

But value underpins the Buy argument, JP Morgan suggesting Lend Lease represents good risk-adjusted value at current levels while also providing leverage to a strong medium-term earnings outlook. 

RBS Australia agrees, arguing while the uncertain shorter-term outlook makes predicting the timing of any re-rating difficult, enough progress is being made in achieving development goals for a re-rating to come sooner rather than later.

Shares in Lend Lease have moved inside trading range over the past year of $6.70 to $9.28, the current share price implying upside of around 32% to the consensus price target in the FNArena database.

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