Inside Lendlease’s $4.5 billion restructure: 3 brokers weigh in

Earlier this week, Lendlease Group (ASX: LLC) announced a sweeping strategic shift, involving a refocus on development activity within Australia and plans to divest a swathe of international projects.

Lendlease’s share price rose 9% on the back of the announcement but remains almost 70% below its five-year high, trading at $6.11 when the market opened today. The firm’s market capitalisation currently sits at $4.5 billion, well below its $11 billion valuation achieved in 2001.

The firm’s newly established Capital Release Unit is targeting the “recycling” of $4.5 billion of capital, with $2.8 billion of this tipped for completion by the end of FY25.

Management also flagged a $500 million share buyback from the proceeds of the sales, which received a mixed response from brokers, as indicated further below.

“We recognise that our security price performance and securityholder returns have been poor as we have faced structural challenges and a prolonged market downturn,” said Lendlease chairman Michael Ullmer.

Emphasising the strategic refocus involved “tough decisions”, Ullmer said he’s dedicating his final months with the business to building the momentum of the overhaul.

Ullmer announced his retirement from the Lendlease board earlier this month. He has faced strong calls to resign from several high-profile shareholders including Tanarra’s John Wylie and Allan Gray’s Simon Mawhinney. The latter holds a 6.2% stake in Lendlease.

Earlier this month, Mawhinney described Lendlease’s recent performance as “diabolical” during an interview with ABC News.

“It has massively underperformed almost any comparator company you can think of…It’s the kind of performance that needs to change,” he said.

The restructure plan vindicates Mawhinney’s call for an exit of all international businesses as a way to free up “about $4 billion investors’ capital tied up in development outside Australia.”

Noting the underperformance had been spread broadly across the firm’s construction, development and investment operations, Mawhinney said shareholders were focused more on the geographic spread rather than individual business units.

“Everywhere but Australia has, for very long periods of time, underperformed. The company clearly doesn’t have a competitive advantage outside of Australia,” he told ABC News.

“Cut deeply, exit geographies and make the company a lot more simple than it currently is,” Mawhinney said.

What the brokers think

Morgan Stanley

• Rating: Retain EQUAL-WEIGHT
• Price target: $7.35, from $7.25

“We like LLC's restructure, in particular the commitment to exit the low returning offshore operations,” said Morgan Stanley analysts. They also noted the firm has been divesting various assets, “with mixed success, for a while now.”

What MS liked – LLC’s transformation into a “modestly geared” company with greater focus on Australia, “where it has traditionally achieved circa 14% annual returns.”

What remains unknown – “Plenty, and that’s the key reason we remain EW despite the sound strategic direction,” said Morgan Stanley analysts.

Key uncertainties:

• the difficulties of pursuing the large-scale of divestments while reducing staff numbers by 35%
• the limited scale of its pipeline of projects in Australia so far: “merely A$6-7 billion, with limited projects due for completion in FY26”.
• continuing to win inflows in funds management globally while stepping away from its traditional development offering.

“Outside of execution risks, the key uncertainty in our view is what is left of LLC post its restructure,” said Morgan Stanley analysts.

“We acknowledge that it intends to have >60% of its invested capital in Investments (with the rest in Developments), and also >75% of funds employed domiciled in Australia, rather than offshore. But here lies our concern - the Australian pipeline is not big.”

On the buyback

Morgan Stanley expressed a view that this could end up considerably higher at around $1 billion. It also said it could be received earlier than the completion of the asset sales and management reaching its target of 5-15% gearing: “It could happen sooner, even if spot gearing is above target range, as long as management is confident/has line-of-sight of de-leveraging.”

Citi

• Rating: Retain NEUTRAL
• Price target: $6.90

“The new strategy should leave LLC looking much better, with significant value upside. However, the complex nature of closing out of businesses will lead to investors being cautious near term,” said Citi analysts.

They estimate there is the potential for LLC’s share price to re-rate to approximately $8 a share but emphasise this relies on the successful execution of asset sales.

On the $4.5 billion of capital realisation announced earlier this week, Citi analysts note that $2 billion of this was previously flagged by management.

Of the $2.5 billion of sales announced today, $400 million will come from US military housing, $400 million from its TRX residential project in Malaysia, and $1.7 billion from International developments and international construction.

“We see potential upside to these proceeds given they include the International construction business (negative asset contribution, given negative working capital, but we had estimated around $300 million of value),” Citi analysts said.

On the buyback

Noting the long-dated prospect of this, “It will be reliant on progress on asset sales, and given long dated timing on some of the asset sales, we believe not much activity may be seen on the buyback near term.”

UBS

• Rating: NEUTRAL
• Price target: $7.10

In a report titled, “What’s left once the dust settles?” UBS analysts noted the key moving parts of the strategy include the initial $2.8 billion of asset sales across:

• Communities - $3 billion
• Military Housing - $400 million
• Australian RL – $400 million
• International development - $700 million.

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

Calculating what’s left after the restructure is a key question, UBS noting that LLC cited $27 billion of early stage projects to add to the existing $13 billion pipeline.

“But the earnings may take many years to recover post asset sales and redeployment of capital,” UBS said.

“Any success in exiting offshore needs to be balanced by remaining at a relevant scale/capability to win new projects,” UBS said, noting these risks explain why it retained a NEUTRAL rating.

This article was first published on Market Index on Wednesday 29 May 2024.