Lendlease shares jumped 11 per cent on the day last month that Australia’s best-known developer called an end to the housing downturn.
Since then, they’ve gained a further 13 per cent to $16.91, lifting the company that also builds and invests in buildings within cooee of the $19.50 they traded at a year ago.
They’ve clearly still got ground to make up, but given the price slumped as low as $11.11 in early January as investors dumped the stock in the wake of a disastrous write-down of its engineering business, much has been forgiven.
In contrast to the half-year results in February that revealed a $1 billion slump in revenue and a two-third cut in dividend, Lendlease’s latest public disclosures were much more comforting. East coast Australia’s weakened residential market had improved housing affordability, and stronger sentiment would mean higher sales, chief executive Steve McCann said.
The company, which in July announced a global headline-grabbing $21 billion partnership to develop residential land for digital giant Google in Silicon Valley, also said the worldwide low interest rate environment would accelerate the global roll-out of its $81.2-billion “urbanisation pipeline” – of for-sale and for-rent housing as well as commercial buildings – that had tripled in size over the past five years.
Lendlease hasn’t erased the problems of the past, but has investors excited about the demand for a service it can offer globally in the hyper-local world of development.
It’s a model the company has shown in a project such as Barangaroo on the western edge of the Sydney CBD, with a public authority client owning land slated for urban regeneration. Barangaroo has its issues – the City of Sydney has criticised the low level of affordable housing and the design that put tall towers up against the water’s edge – but the developer can argue it has operated within the parameters set for it by the state government.
For local and other public authorities around the world – who want to develop land but having being stung by developers who had bought land for regeneration and then failed to do anything after the global financial crisis and subsequent credit crunch – Lendlease’s model is attractive.
It allows the landowner to maintain ownership of their land – and a degree of control – until phases of the project complete and settle to their new owner.
It’s not an easy game to get into, but having shown they can do it, Lendlease is poised to benefit from it, says JP Morgan analyst Ben Brayshaw.
“Barriers to entry are high because of the skills, track record and access to capital required to win large-scale projects,” Brayshaw says.
“Impetus to maximise sub-optimal sites in urban locations is an ongoing theme in our view, and vendors have a preference to deal with one counter-party which favours Lendlease.”
Others agree. The global urban regeneration business model also plays to Lendlease’s strengths, Morningstar analyst Adam Fleck says.
“The strategy is to be vertically integrated, enabling Lendlease to generate income from each stage of the process: deal structuring and financing, developer fees, construction fees, and fund management fees if the assets are ultimately purchased by its property management platform,” Fleck says.
But it is not without risk.
“While Lendlease has managed development risk to date by securing presales and utilising third-party capital, shareholders could be exposed to capital losses if interest rates unexpectedly spike, triggering falls in the value of property assets,” Fleck warns.
Lendlease is rightfully promoting its global urbanisation business – which includes Singapore’s 12-hectare Paya Lebar Central precinct project and which last week opened its retail segment – but it hasn’t yet resolved problems at its troubled engineering and services arm.
The relief expressed by analysts over the full-year results was largely due to the fact that the company dropped no more nasty surprises in the form of writedowns at the infrastructure-related arms that it is seeking to offload.
“After a very messy first half where $500 million [in] impairments were announced the second half was a relatively clean result,” UBS analyst Grant McCasker says.
“More importantly, Lendlease announced no further engineering & services provisions and that the sales process is progressing.”
No further bad news was clearly good news.
“The company confirmed that the level of provisioning is appropriate, providing comfort that at this stage there are no new issues,” Bank of America Merrill Lynch analyst Sameer Chopra wrote.
“Of the three problematic projects, Gateway is operational and NorthConnex plus Kingsford Smith Drive are 85 per cent complete.”
Analysts retain doubts over some projects, including the $11 billion Melbourne Metro rail projects, which is being undertaken by the Cross Yarra Partnership consortium comprising Lendlease, John Holland Group and Bouygues Construction Australia.
Tunnelling is seen as one of the most precarious types of infrastructure work and costs on the $11 billion Melbourne Metro project, which tunnels under Melbourne’s CBD, have been rumoured to already have blown out by as much as $2 billion, partially due to the scope of the project being widened and unexpected technical risks.
“Whilst no provision has been taken against Melbourne Metro, this project remains a risk in our view,” Macquarie Securities analyst Stuart McLean says.
Even though the company has declared the engineering and services businesses to be non-core, it has been winning new work that makes the units a more attractive proposition.
Last week the federal government announced a joint venture between Lendlease and CIMIC subsidiary CPB Contractors had won a slew of projects related to the new Western Sydney International Airport as part of a $644 million contract.
“Lendlease is now offering three long-dated projects comprising about $3 billion which underpin about 75 per cent of its backlog: Westconnex Part 3a (2022), Badgerys Creek (2022), and Melb Metro (2024),” JP Morgan’s Brayshaw says.
But if the local residential market has turned, so have Lendlease’s prospects for further development at Barangaroo.
On the day the company announced its full-year results, it also said it had resolved a simmering dispute with the NSW state government to protect sightlines of the harbour and Sydney Harbour Bridge for its buildings at Barangaroo South, said it would start marketing units in R1, the tallest in the One Sydney Harbour residential precinct next to the Crown tower – a new series of three high-rise towers – before the end of this year.
The 72-floor, 300-unit-plus Renzo Piano-designed R1 has a height of 247 metres, while the 60-floor, 207-metre second building will have just under 300 and the 29-floor, 104-metre third building will have about 150 apartments.
Analysts are already sizing up profits from this next round of homes the company plans to develop.
“With sight lines for the next stage of residential at Barangaroo resolved, Lendlease will launch the first of three towers,” Macquarie’s McLean says.
“The first tower will comprise 317 units and adopting an average price per unit of $3.8 million [or $30,000 per square metre] results in $1.2 billion of revenue. Assuming a 15 per cent margin, this is $180 million of EBIT [profit] or 11 per cent of group EBIT in FY23.”
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