Lendlease: We Think Earnings Trough Has Passed and We Anticipate Further Recovery

We don’t think it makes sense for Lendlease to trade near its net tangible assets of 8.09 as at December 2022. About half the group’s EBITDA comes from funds management, development and construction, businesses that are largely excluded from the NTA calculation. Admittedly, construction is in a lull, with EBITDA margins for the December half a low 1.8%, down from 2.6% in the prior half and below the 2%-3% target range. Management recently confirmed it will cut staff in that division, which doesn’t bode well for construction margins in the near term. We view construction as a low-margin, risky business with its main virtue to provide Lendlease with expertise for its development business rather than generate profit. Given the headwinds from lockdowns and shortages of raw materials and labour since 2020, we’re relieved that construction margins did not collapse into negative territory, and would not view a further decline in margins as a major negative, so long as it is modest and temporary. Meanwhile development and funds management look set for substantial earnings growth as Lendlease expands its development pipeline, with about half the pipeline being residential property.