Lendlease Earnings: Result Underwhelming, but Recovery Has Momentum

Earnings underwhelmed in no-moat Lendlease’s LLC fiscal-2023 result, but underlying progress was respectable. Our fair value estimate is unchanged at AUD 14.45 per security. Time value of money was offset by unexpected provisions relating to receivables due from the 2021 sale of a United States telecommunications business, and increased provisions for United Kingdom government action on residential buildings.

Annual operating earnings of AUD 257 million were below our estimate of AUD 406 million. However, earnings are influenced by lumpy disposals which can land in one financial year or the next. We still anticipate sales of stakes in various interests which could include military housing, Australian communities and retirement living businesses, and Lendlease’s China-based retirement business Ardor Gardens.

Such disposals should allow Lendlease to redeploy capital to its development pipeline, which increased 6% to AUD 124 billion over the year. The group increased work-in-progress 24% to AUD 22.9 billion, up from AUD 18.4 billion. Assuming an average 2.5 years per project, WIP now looks sufficient to achieve the targeted AUD 8 billion of annual completions, more than double the depressed AUD 3.6 billion of completions achieved in fiscal 2023. Profitability remains key, and management reaffirmed that Lendlease is on track to achieve its target return on equity of 8%-10% this year. Caveats are that fiscal 2024 is expected to be at the low end of that range and incorporates expected profits on the sale of the valuable communities business—a one-off event. That said, inflation appears to be moderating in Lendlease’s key markets, which should make for more predictable construction costs and end values on completed developments. On that basis, we think Lendlease should be able to maintain roughly 8% return on equity, as development volumes and margins improve. This translates to earnings of over AUD 500 million in fiscal 2024.