Lend Lease Goes The Hungry Mile

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 – Lend Lease update within expectations
 – Barangaroo remains a major potential catalyst
 – Most brokers sees value at current levels
 – Upside may take time to be realised

By Chris Shaw

Yesterday property developer Lend Lease ((LLC)) held its annual investor day and the news from the company was largely in line with market expectations. Market conditions remain tough in general, but management remains of the view the core businesses are in good shape for when markets eventually improve and progress continues to be made in achieving a targeted return on equity of 15%.

With respect to the key Barangaroo project, Macquarie notes Lend Lease has reached commercial terms on a two tower deal at the Sydney Harbour site. Tenants and capital partners have yet to be signed up but as JP Morgan notes, the expectation remains that any deal will see a 25% equity contribution from Lend Lease.

An agreement is expected by the end of FY12 and should be a significant de-risking event in JP Morgan's view, as a deal would allow Lend Lease to start booking profits on the project. Elsewhere in the $20 billion development pipeline, Lend Lease indicated solid progress has been made on recent months in projects such as the RNA Showground and LEM in Singapore.

BA Merrill Lynch notes the introduction of institutional co-investment capital into 70 retirement villages remains at least 12-18 months away. When this investment is achieved it will be significant as the broker estimates it would free up $1 billion in capital for Lend Lease, which could then be invested in the development pipeline.

Construction operations continue to suffer from weak market conditions but the Valemus business remains on track to meet its full year target of being 15% earnings per share (EPS) accretive according to JP Morgan. Citi was also positive on the outlook for Valemus, viewing the business as well placed for growth as conditions improve.

With respect to residential activity, which accounts for about 10% of group earnings, Macquarie notes management at Lend Lease remains of the view further stimulus is required to generate a turnaround. Lot sales this year are expected to be flat relative to FY11 and conversion times remain elevated, management suggesting a further 50 basis point cut in interest rates is needed to generate a rebound in activity levels.

With no specific earnings guidance accompanying the investor day, changes to broker earnings estimates for Lend Lease have been modest. A lower tax rate sees BA-ML lift its full year number by about 4%, while Macquarie has trimmed FY12 and FY13 forecasts by around 1% each. Consensus earnings per share (EPS) forecasts for Lend Lease according to the FNArena database stand at 78.4c for FY12 and 86.3c for FY13.

The minor changes in forecasts mean modest adjustments to price targets, the consensus price target according to the database moving to $9.09 from $9.21 prior to the update.

Ratings remain unchanged, the database showing Lend Lease is rated as Buy by six brokers and Underperform by one, BA-ML. This reflects a valuation call, as the share price is above target and in BA-ML's view while the business is well placed to benefit when conditions improve it may be FY14/15 before this occurs.

The rest of the market is more positive, JP Morgan arguing an Overweight rating is appropriate as the stock is trading at a 25% discount to the broker's average valuation at present and the medium-term earnings profile is healthy.

Macquarie similarly sees value given its earnings forecasts for FY12 imply Lend Lease is trading on an earnings multiple of 10 times at current levels. Greater diversification across both geographies and disciplines should shield earnings to some extent in Macquarie's view, while there is upside potential from updates on tenants and capital partners at Barangaroo.

Post Lend Lease's investor day the stock is trading slightly higher despite a weak overall market, the stock up 12c at $7.45 as at 1.40pm. Over the past year the stock has traded in a range of $6.70 to $9.26, the current share price implying upside of more than 21% to the consensus price target in the FNArena database.

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