Positive outlook for Lendlease despite messy result
Construction giant Lendlease has reported full-year net profit after tax of $792.8 million, up 5 per cent on 2017, prompting Morningstar to boost its fair value estimate.
Construction giant Lendlease (ASX: LLC) has reported full-year net profit after tax of $792.8 million, up 5 per cent on 2017, after successfully executing key strategic initiatives alongside its capital partners.
Management also announced a full-year distribution of 69 cents per stapled security, up 5 per cent and representing a dividend payout ratio of 50 per cent.
Morningstar equity analyst Tony Sherlock describes the result as "messy", refering to the negative earnings impact of $260 million of engineering-related impairments. "But this was largely offset by significant uplift in non-cash revaluations of investments, of between $228 million and $305 million," he says.
Sherlock views growth in the developer's assets under management - up 15 per cent to $29.6 billion over the year - as the key positive from the result.
He increased his fair value estimate by 6 per cent to $18.50, from $17.50, in response to the company's improved outlook for AUM and fee income.
Improved AUM and fee income outlook prompted Morningstar's FVE boost
The development pipeline has increased by 44 per cent, or $21.8 billion, to $71.1 billion. Construction backlog revenue stands at $21.1 billion with an additional circa $12 billion of preferred work at 30 June 2018.
Group chief executive and managing director Steve McCann says, “Our ability to secure [our] development pipeline, combined with the support of our capital partners, has allowed us to progress strategic opportunities across the residential-for-rent, office, retirement and telecommunications infrastructure sectors.”
Lendlease’s strategic initiatives included four major urbanisation projects in Europe. In addition, capital partnerships included a US residential-for-rent investment partnership with US$1 billion equity investment and a UK residential-for-rent investment partnership with an initial target of 1.5 billion pounds.
“Our major urbanisation projects delivered more than 1300 residential apartment units and generated commercial profits from four office developments,” says Mr McCann.
In addition, the investments segment is in a solid position to deliver recurring earnings derived from $3.4 billion of investments, $30.1 billion in funds under management and approximately $4 billion of secured future funds under management.
Morningstar analyst Tony Sherlock says, “The result for the past year was impacted by impairments in their engineering division, so that will wean off over the next 18 months and get a pick-up in 2021. And there’s a big shift in where Lendlease are putting their capital – moving it out of Australia and into the US. For example, as they sell apartments in Sydney’s Darling Harbour they will move the funds to the US where they see a stronger runway.”
Sherlock also says that Lendlease is moving away from its old business model of buying land, building something and then selling it.
“Instead, they will be building assets that generate a steady stream of income that can be transferred into a fund, e.g. from telecom towers. This transition is important as it means Lendlease will have a steadier stream of recurring income,” he says.
Lendlease’s share price was trading at $20.24 late on 22 August, a premium to Morningstar’s most recent fair value estimate of $17.50 at 29 June 2018.
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Roger Balch is a freelance journalist working for Morningstar Australia
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