Lendlease: Bringing It Back Home

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Lendlease plans to divest of offshore assets and bring its focus back to Australia, resulting in reduced gearing and capital returns. Brokers are positive, but warn of the risks involved.

-Lendlease to sell offshore assets
-Gearing to reduce, share buyback to follow
-Execution risks will be key
-Brokers are positive but cautious

By Greg Peel

Lendlease Group ((LLC)) is an integrated real estate and investment company operating in Australia, Asia, Europe, and the Americas through Development, Construction, and Investments segments. The company is involved in everything from apartments to retail, retirement villages, commercial and social developments.

Once one of Australia's largest and iconic corporate brands, things haven't exactly worked out for management or loyal shareholders. It was only in 2020 the Lendlease share price briefly touched the $20 mark. Today, those same shares are trading a little above $6 for a remnant market cap of no more than $4.35bn.

It seems the pressure was building, and building.

At its strategy day on Tuesday, management outlined plans to sell most of the international business and refocus on Australia. Lendlease will exit its offshore Construction and Development business, but retain investments in the US, Europe and Asia.

Analysts consider the move as positive, but not without risk.

UBS suggests Tuesday’s share price reaction –up 8%– reflects broad market support for the plans outlined, that the tone and timeframes indicated were better than low market expectations, and that fears of a capital raising were likely allayed with talk of a $0.5bn buyback funded by the initial proceeds from $2.8bn of “on market” asset sales.

Beyond this, a further $1.7bn of assets are to be sold including offshore construction. This may allow further capital returns and redeployment of capital into new projects in Australia to replenish the pipeline.

Only 72 hours after plans were communicated with investors and the media, Lendlease announced it has struck a deal to sell its construction business in the United States, having negotiated a deal with Consigli Constructions for the sale of its US East Coast operations. That business includes around 45 current, under contract and pre-construction projects.

Not Without Cost

The $1.7bn of further asset sales reflect residual engineering, construction development, including development joint ventures and other land, inventory and land management assets, with a -$0.5bn provision allowing around a -20% discount to book value when exiting projects.

After allowing for a -$1.3bn pre-tax impairment, which would include the -$0.5bn discount to exit developments, restructuring costs of -$0.1bn and goodwill/tax write offs of -$0.7bn, this would fund the initial $0.5bn buyback, further capital returns and reinvestment into the Australian business.

That’s the plan.

Lendlease ensured it has strength of relationships across the key markets and is constantly talking to capital partners. The company sees its move back to Australia as one of simplification and reduction in overall business risk profile, Barrenjoey notes. Management expects this will improve the earnings quality with more overall earnings coming from Investments and all of this is seen as credit positive (reduced gearing).

Management expects to release $4.5bn of capital, and will also undertake cost out of -$125m per annum within the first twelve months.

Lendlease highlighted an ongoing focus towards being an investments-led business, Macquarie points out. The group is now targeting greater than 60% capital allocation to investments (prior 50-70%) and 50% of earnings (prior 40-50%), and while development is still targeted to be a material component of the platform (less than 40% of capital and 35% of earnings), these targets were reduced.

Finally, construction is now forecast to be 15% of earnings, up from 10%. The changes will be driven by the group seeking to divest $4.5bn of operations in offshore development and construction while maintaining a global investments presence. Within the $4.5bn of potential sales, $2.8bn of capital is anticipated to be released within 12 months. The restructuring will incur around -$1.2bn-$1.5bn of impairments and charges.

Gearing

At its half-year results presentation in February, Lendlease revealed a gearing level of 23%, which left the market uncomfortable and led to aforementioned fears of a required capital raise. Asset sales will lead to a reduction in gearing, net of charges and impairments the sales will trigger.

Management will provide more detailed numbers with its full-year result in August, but the goal is a reduction in gearing to just above the midpoint of its earlier 10-20% preferred target. This reflects anticipated cash flows from the sale of the communities business, Ord Minnett notes, subject to ACCC approval, and settlements previously sold apartments at Barangaroo on Sydney Harbour where, incidentally, the company is headquartered.

Gearing will likely continue to moderate with planned international sales. Management now targets a lower preferred gearing range of 5-15% and expects to be within that range by the end of FY26.

The announced $500m share buyback is not dependent upon finalisation of all asset sales, Morgan Stanley points out, or gearing to drop within 5-15% target. It could happen sooner, Lendlease suggested, even if spot gearing is above target range, as long as management is confident it has line-of-sight on deleveraging.

Risky Business

Ord Minnett believes Lendlease will be able to return gearing to the range, balancing the capital drain of new developments with selling completed projects to end-buyers, and selling stakes in incomplete projects to capital partners.

The broker suggests the overall plan is a “good move”, and expects Lendlease to break ground on more sites, increase sales and improve disclosure. But projects that play out over decades have risks, leading to high uncertainty.

Back in February, Ord Minnett had a buy rating on the stock with a $13.00 target. Both are now under review.

Macquarie sees a simpler business model for the company ahead, but execution on investments with limited impairments is the key hurdle in this broker’s view.

Macquarie is advising the company and thus is under research restriction, unable to provide a rating or target.

Following a brief update, Morgan Stanley has retained an Equal-weight rating and a $7.35 target, with an “in line” view of the industry.

Lendlease cited $27bn of early-stage projects to add to the existing $13bn pipeline, but the earnings may take many years to recover post asset sales and redeployment of capital, UBS warns. Any success in exiting offshore needs to be balanced by remaining at a relevant scale/capability to win new projects.

Given the risk in refocusing to the core, UBS retains a Neutral rating with a $7.10 target.

Citi believes investors will remain cautious on Lendlease due to the complexity of the business restructuring involving the divestment of $4.5bn in assets.

The broker highlights $2.8bn out of the total is already on the market and there are expectations of sales within the next 12-months, with the remaining $1.7bn taking longer to secure, management suggesting FY25-FY28.

Citi emphasises the shares could re-rate to $8.00 on successful asset sales, so execution is key. This broker retains a Neutral rating and $6.90 target.

Of the five brokers monitored daily by FNArena that cover Lendlease, three have Hold or equivalent ratings, one is restricted and one is reviewing its numbers. Of the three, target price consensus is $7.12.

Barrenjoey (not monitored daily) likes the new strategy, which should see Lendlease deliver higher quality earnings, and this is coupled with the prospect of a material capital return and lower forecast gearing. However, Barrenjoey is cautious on the execution risks.

Barrenjoey retains its Underweight rating with a $6.25 target.

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