Lend Lease Bid Highlights Value Among Retirement Plays

This story features LENDLEASE GROUP, and other companies. For more info SHARE ANALYSIS: LLC

By Chris Shaw

Lend Lease ((LLC)) may have been knocked back in its advance on FKP ((FKP)) but many in the market believe some sort of deal remains a possibility, Austock Securities noting the reasoning behind the bid was Lend Lease’s drive for greater diversification and specifically to increase its exposure to the retirement sector.

While the broker notes FKP remains the company’s number one target for the estimated $1.5 billion it has available for expansion opportunities there are a range of other potential acquisitions Lend Lease management could consider. Among those stocks the broker covers the list includes Aevum ((AVE)), Becton ((BEC)) and Babcock & Brown Communities ((BBC)).

Of these, Austock points out Becton is the most directly comparable to FKP as both are diversified REITs, the broker rating it and Aevum as Buys, while BBC scores a Hold rating. Any move on Aevum would give Lend Lease or any other buyer immediate scale in the New South Wales market given the group’s focus on inner Sydney and the NSW Central and North coasts, while operations in Western Australia would add to the consolidation opportunities available in both markets.

The group operates a niche strategy in that it has mid-market assets that are well located and so deliver growing deferred management fees, while its good reputation in the market and solid track record with respect to acquisitions as well as its lower risk brownfields rather than greenfields development portfolio leave the company well placed, in Austock’s view.

On the downside the broker notes the assets are a little older in some areas and so would require greater levels of capex, while the company is simply not as diversified in its operations as is FKP. This because it is a pure retirement play. Babcock & Brown Communities is another pure retirement play but it has a more diversified portolio in terms of asset quality, though one potential knock in the broker’s view is BBC doesn’t include any inner city prime exposure.

While recent share price weakness offers a more attractive entry point the broker notes the existence of a 25-year management agreement with Babcock & Brown ((BNB)) could be something of a poison pill and so may reduce interest from a corporate perspective. As well the group is less diversified than FKP and so may be a less attractive target in its view.

Becton on the other hand offers operations spanning retirement, development and property funds management. Becton has high quality assets across a range of attractive locations, says Austock, with its retirement assets providing scale across inner city locations in both Sydney and Melbourne.

The company also enjoys a good reputation for niche developments and is a sizable player in retail funds management, though this may be less attractive to Lend Lease in the broker’s view given that company is already a major player in the funds management sphere.

Another possible negative is the group’s retirement portfolio is weighted towards development assets and greenfields developments, which means a greater capex requirement to bring these opportunities to a fully completed level.

In terms of which stock offers investors potentially the greatest upside from current levels the broker has applied to Becton similar multiples to the proposed FKP deal, which implies a P/E of 10.9x FY09 earnings per share and 10.6x in earnings before interest and tax terms.

Adding in a discount of 30% to factor in the smaller size of the company and its slightly different business mix the broker generates a valuation for the company of $2.89, which is about 16% below its blended valuation of $3.35 and so suggests the stock may be a less attractive target.

A similar approach would be inappropriate for Aevum and Babcock & Brown Communities in the broker’s view as both offer pure retirement exposure, so a more relevant method would be to incorporate the same retirement book value/EBIT (earnings before interest and tax) multiple as the FKP offer implies.

Adopting such a method but using a discounted multiple of 12.5x rather than the 14x multiple offered for FKP implies a valuation for Aevum of $3.78 per share and for Babcock & Brown Communities of $0.72, which suggests significant upside from the current share prices of both stocks.

Given the specialised nature of both companies their coverage in the market is limited, the FNArena database showing only ABN Amro actively covers Aevum, giving it a Buy rating and price target of $3.23, while Babcock & Brown Communities scores two Holds and one Overweight recommendation, with an average price target of $0.79. Becton in contrast is rated Buy by both Macquarie and ABN Amro, with an average price target of $3.63.

Shares in the three companies today are mixed, with Aevum trading unchanged at $1.98, Becton 18c lower at $1.45 and Babcock & Brown Communities down 2.5c at $0.445 as at 12.05pm.

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