A trading update provided to the ASX on 15 November highlighted that LendLease (ASX: LLC) has made a strong start in FY25. The Company also pointed to further improvement in FY26. The latter is underpinned by profitable Funds Under Management (FUM) growth, an improvement in co-investment yields, and higher transaction volumes.
Accordingly, we recently researched LendLease in The Dynamic Investor and concluded that the shares presented an opportunity. The shares momentarily gained around ~10% since our report and was trading close to its valuation. However, with market expectations on ‘sooner-than-later’ rate cuts since tempering, LLC’s shares have similarly retraced. We consider whether current levels present another re-entry opportunity.
About Lendlease
LendLease Group is a diversified, global property group that derives earnings from diverse sources. These include property development, residential development, project management, construction, and management (funds and property).
Key Fundamental Drivers
Making Progress on Refreshed Strategy
In May 2024, the Company announced a refreshed corporate strategy. The key focus areas are cost savings, divesting its offshore Construction businesses and recycling $4.5b of security holders’ funds. The latter is to be achieved via the divestment of businesses and assets and releasing capital from offshore development projects.
At the recent trading update, the Company confirmed that the cost out program remains on track. In the six months since announcing the asset sale program, the Company has made significant progress. The Company has now completed four assets sales that represent more than half of the $2.8b capital recycling target set by the Company for FY25.
Potential for Development Segment to Grow Further
The Development segment performed strongly in FY24. A key investor concern has been the potential for weaker development earnings in FY26. This is because the pipeline for new projects appears to have waned. There have not been any new significant projects won recently (other than $0.5b for luxury apartments in Darling Point). In addition, only one of the Australian development projects (Melbourne Quarter) completes in FY26, and earnings have been recognised already at this project.
There are several qualitative earnings drivers for FY26:
i) Materially lower debt and interest cost savings in FY26,
ii) Normalising construction margins and higher construction revenues,
iii) FY26 is expected to see a number of international joint venture projects complete and
iv) Improved market conditions expected in FY26 for the Investment division driving FUM growth, higher transaction volumes and an improvement in co-investment earnings yields.
Margin Improvement Expected for Construction Segment
At the recent trading update, LLC flagged that FY25 earnings for the Construction segment are likely to be weaker as COVID-related projects complete. Rising construction costs have been an industry issue impacting all developers, with LLC similarly affected. Looking ahead, though, a return to more normal operating conditions in FY26 is expected. As such, management has flagged an improvement in margins in FY26, along with higher revenues.
Gearing To Trend Back Towards Target Range
Gearing as at 30 June 2024 was 21.1%, down from 22.9% a at 31 December 2023. While this was above the new target range of 5-15% (prior 10-20%), there is a pathway back to LLC’s target gearing range by the end of FY26. This is mainly from proceeds from announced transactions and net cash inflows from One Sydney Harbour apartment settlements.
In the interim, gearing is anticipated to remain elevated as at 31 December 2024 (1H25) due to two factors, Firstly, the timing of the receipt of asset sale proceeds and planned CAPEX across major development projects.
Fundamental View
LLC shares are currently trading at discount of ~12% to its valuation. We consider that there is potential for the valuation gap to close given the prospects for: i) Further asset sales and/or development projects, ii) A reducing gearing profile, iii) The potential for capital management. In particular, the $500m share buyback proposed at the Strategy Day in May 2024 is dependent on further asset sales and iv) Origination of new opportunities to support medium term earnings for the Development segment.
The recent improvement in the shares demonstrated how quickly this valuation gap can close when market sentiment shifts.
Charting View
LLC remains in a long-term downtrend. It needs to breach that previous high near $7.50 and start breaking this long-term downtrend before it can start to look more attractive from a charting point of view. If it can do that, then there is potential for the shares to turnaround and start trading at higher levels again.
Michael Gable is managing director of Fairmont Equities.
CLICK HERE to read our Testimonials.
Current share prices available here.
You can learn more about technical analysis in this article.
An 8-week FREE TRIAL to The Dynamic Investor can be found HERE.
Would you like us to call you when we have a recommendation? Check out our services.
Disclaimer: The information in this article is general advice only. Read our full disclaimer HERE.
Like this article? Share it now on Facebook and X!