Lendlease’s Underlying Cash Earnings Obscured by Adjustments. FVE Increased to AUD 16

The hugely diversified nature of Lendlease Group’s business means results are rarely clean, but earnings for the six months to December 2017 were particularly convoluted. Lendlease is in the business of developing and selling assets, but it is disconcerting the recognition of profit continues to come well ahead of the cash in many instances. Noncash revaluation gains exceeded AUD 300 million, almost half the pretax profit of AUD 624 million. Some of these gains will be crystallised in the near term, whereas the valuation uplift for the 75% stake in the retirement business isn’t expected to be sold for maybe five years. That said, there is still significant valuation uplift expected from Lendlease’s stake in Sydney office towers we foresee being sold within two years. Nonetheless, the booking of profits in advance of cash receipts presents risk of a significant earnings hole if asset values were to retrace, the likelihood of which is increasing as U.S. 10-year government Treasuries inch higher.