Lendlease (LLC), the multinational construction and asset management company, reported with mix results yesterday morning, with this being their second year of changing the business to an investment led company from a construction led company. The Core Portfolio has a 2% weight to LLC.
- Investments: Funds under management grew by 9% to $48 billion with revenue growing by 3% to $177 million. EBITDA earnings did lag the growth falling by 13% due to the timing of asset completions as well as higher input costs.
- Strong Development Pipeline: Development proved to be the best operating segment this year, with EBITDA increasing by 56% on last year, with the new main developments being Sydney Place, Blue & William in North Sydney and City Lights Point in London. Construction revenue was up 9%, to $7.2 billion, with the EBITDA earnings falling by 31% due to having to take out provisions against projects in the US and UK.
- Prioritising Balance Sheet Strength: management has made it clear that they will continue to focus on maintaining and strengthening their balance sheet over perusing new growth with the construction arm of the business set to pull back on bidding for international ventures and focus more on opportunities in Australia. Gearing at 15%
- Maintaining Dividend: Due to Lendlease’s balance sheet strength, Lendlease were able to retain their full-year dividend at 16 cents per share despite their core operating profit after tax falling 7% to $257 million.
- Outlook: Lendlease has given group guidance of a return on equity of 8%, at the lower end of their target range (8-10%), as they continue to find cost-saving measures, with next year predicting another $60 million in cost savings.
- Why is the stock off? The stock is off primarily from the guidance being at the lower end and lower than analysts’ expectations as they plan to sell a portion of their communities’ business over the coming year.
Portfolio Strategy: LLC gives the portfolio exposure to a globally diverse pipeline of developments and gives good long-term earnings visibility. The volatility of company profits will decrease now the engineering business is off the books. The company’s business model is 1) to reduce risk by bringing in a financial partner at the development stage, 2) generate development profits as the project such as office towers in Barangaroo are developed, then 3) vend the completed assets into an unlisted fund that they manage thus delivering ongoing annual funds management revenue. LLC trades on a forward PE of 11x, and with a weaker share price, LLC is a potential M&A target with a significant footprint in all the main developed markets, including UK/Europe, the US, Asia and Australia. Industry Fund, Aware Super, sits at 9% of the register.
Lendlease finished down 2.8% to $8.24.