Lend Lease Reinforces Positive Earnings Outlook

This story features LENDLEASE GROUP. For more info SHARE ANALYSIS: LLC

-Strong residential pre-sales
-Infrastructure pipeline growing
-Clear earnings profile
-Some concerns over valuation
 

By Eva Brocklehurst

Lend Lease ((LLC)) is sailing with the wind. Brokers welcomed the re-statement of the company's strategy and outlook at the recent investor briefing. Execution of existing projects and a large construction backlog are central to Lend Lease's strategy but the company continues to assess opportunities to weight its net investment beyond Australia, in particular with regard to Malaysia and the US. Opportunities in healthcare and seniors living are also increasingly sought, albeit they remain at the margin of the company's businesses.

Development pre-sales are not slowing and UBS observes there is a $13.0bn backlog in the company's construction/infrastructure work in Australia which compares with $9.3bn back in June. Investment capital flows are strong and 67% of development capital is now invested in production versus 21% in FY12, which maximises development earnings in FY16/17. FY15 earnings are largely de-risked and growth of 10% in FY16 and FY17 is considered easily achievable. For UBS there is no question about momentum, it is valuation. The price to earnings ratio is at 14.1, and the broker expects the favourable backdrop will moderate and provide some downside risk in the short term.

The company is shaping up well for the next three years in CIMB's view. The profitability outlook is very clear, especially for the major project pipeline. Management is content with its existing strategy but has signalled an intention to expand the existing healthcare exposure and CIMB believes Lend Lease's integrated model will work well in this regard. Lend Lease's construction division is being rewarded by increased expenditure on road infrastructure as well as the company's own development pipeline. The brokers observe investment management is also performing well.

CIMB considers the company's earnings profile is being underestimated by the market for the next three years. This profile is largely dependent on the development division, which is also strongly underwritten by apartment pre-sales. These may not yet been recognised in the profits but are considered gold plated certainties nonetheless. The broker is well aware of the difficulty in replacing major projects in the company's portfolio as underlying asset prices increase but for the near term, believes the stock deserves an Add recommendation.

With an increasingly busy construction work book the company looks well placed, in Macquarie's opinion. Residential pre-sales strength is maintained and Lend lease has launched the next phase of apartments at The Green. The next phases of Richmond, Victoria Harbour, Darling Harbour, Barangaroo and Waterbank are on the slate. Beyond its Australian base, Lend Lease is looking to allocate incremental capital offshore into urban regeneration opportunities as it believes the Australian economy will underperform other global economies in the next few years. Despite this, Macquarie considers the Australian infrastructure backdrop is very positive for Lend Lease with recent wins on NorthConnex and East West Link. Indeed, the company has indicated the level of activity on Australia's east coast has escalated quicker than it expected. The next opportunity is the Stage 1a of WestConnex, which is a $400m project to widen Sydney's M4.

Macquarie also acknowledges the value proposition is diminishing with a re-rating of the share price, but believes this proposition will be supported by the ultimate delivery of earnings growth in FY16 and FY17 and, given the high degree of certainty in that regard, the broker maintains an Outperform recommendation.

Other insights Macquarie gathered include the observation that institutional interest in Australian retirement is low and selling down a stake in the Australian retirement business is still a couple of years away for Lend Lease. The company is still looking to expand retirement investment into Asia, if the deferred management fee model is the appropriate approach in the region. The company suspects commercial real estate is nearing the top of the market and wants to be disciplined and capital efficient in considering re-stocking opportunities. As a result, Lend Lease also indicated that if it cannot find the right sites in which to invest, it may consider some form of returning capital.

Lend Lease expects organic growth over the next few years and will not rely on acquisitions. Still the company intends to increase its development presence in the US across residential and healthcare and hopes to secure 2-3 large urban regeneration projects in this region in the next few years. FNArena's database contains six Buy and two Hold ratings for Lend Lease. The consensus target is $15.23, which signals 2.2% upside to the last share price. Targets range from $14.50 (UBS) to $16.02 (Macquarie).
 

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