We place no-moat Lendlease (ASX: LLC) under review as we evaluate the company’s change of strategy, which was revealed this week.

The strategy involves selling most of its international business and refocusing on Australia. The downside isthat it likely relinquishes some of the value in Lendlease’s very long-term development projects. On the upside, we think it offers the benefit of greater certainty, reduced risks, and potentially quicker recognition of the value we see in Lendlease. Possible catalysts to unlock the value include asset sales, a simplified business, and a proposed capital return to shareholders once certain milestones are met.

The planned asset sales will likely trigger charges and impairments, with detailed numbers to come at annual results in August 2024. Excluding these negative impacts, management expects gearing to be modestly above the midpoint of the current 10%-20% target, well below the 23% gearing from the February 2023 results presentation. This reflects anticipated cash flows from the sale of its communities business (subject to Australian Competition and Consumer Commission approval) and settlements on previously sold apartments at Barangaroo.

Lendlease’s gearing will likely continue to moderate with the planned international asset sales. Management targets a reduced gearing range of 5%-15% and expects to be within the range by the end of fiscal 2026, which looks reasonable considering planned asset sales.

Our fair value estimate may come down, but we are still highly likely to view Lendlease as considerably undervalued.