Lendlease under the Radar: Watch out for these trends for Construction Stocks

Summary

• Though the real estate sector was adversely impacted during the COVID-19 crisis with experts believing that the housing market might slip by ~30%, they now opine that the price fall would perhaps be modest.
• The second wave of COVID-19 could slow economic recovery. Discussions between APRA and the banking industry are in progress to curb the impact on the Australian economy.
• The performance of the construction segment was impacted across regions as there was a delay in the conversion of several opportunities across urbanisation projects.
• For FY2021, LLC is expected to remain well-placed to execute delivery of global development pipeline and seize other investment prospects.

The real estate sector was amongst the ones that were hit hard owing to the COVID-19 pandemic and the associated recession and social turmoil. The S&P/ASX 200 Real Estate index, during the initial stage of COVID-19 crisis, dropped from 4035.45 on 20 February 2020 to as low as 2048.40 on 23 March 2020. However, a marginal improvement was noticed in the index, and as on 7 July 2020, the index closed at 2,862.9.

A couple of months ago, market experts predicted that Australia’s housing market might fall nearly 30% in the worst-case scenario of a prolonged COVID-19 crisis. However, opinions took a slight turn as the situation improved in the country, and the experts started believing that the price fall would be probably modest relative to the earlier projection.

Currently, two substantial risks which the industry is expected to experience are:

• The second wave of COVID-19 infections, primarily in NSW and Victoria that could hinder the Australian economy’s recovery.
• The challenges that will emanate once the support packages announced by the government end.

The financial system regulator, APRA is in discussion with the banking industry on ways to avoid the impact on the Australian economy and the property market.

On a positive note, as projected by the RBA and IMF, the Australian economy would bounce bank more strongly than any other developed nation globally.

Let us look at an ASX-listed real estate player, Lendlease Group and understand its journey during the COVID-19 crisis, its recent updates, and how is it placed presently.

Lendlease Group (ASX:LLC)

Lendlease is an international company with operations in the APAC, Europe, and the Americas region in fields of retail property management, asset management and development. The Company holds core expertise in shaping cities and creating healthy and connected communities.

Its areas of expertise include:

• Commercial and Expertise
• Communities
• Retirement Living
• Retail and mixed use
• Education
• Health and Scientific Research
• Living Utilities
• Defence
• Technology and Podium- Lendlease Digital

In the last decade, the shares of the Company delivered a return of ~67%. In the last year, the shares have generated a negative return of -13.65%. However, the previous three months have been favourable with LLC providing a return of 18.54%.

Trading Update:

In a market update released on 28 April 2020, the Company stated that the profit for FY2020 would depend on:

• The end of a few material transactions in the development segment.
• The impact of diminished efficiency in the Construction segment.
• The effect of any revaluations in the investment segment.

On 1 July 2020, the Company released an announcement where it highlighted that it is in a better position to provide greater clarity on the impact of these issues.

LLC’s development segment experienced a delay in the conversion of several opportunities across urbanisation projects due to COVID-19 impact, which includes Melbourne Quarter, Barangaroo and International Quarter London. The effect was also because of delays in the apartment settlements plus the higher cancellations across the Communities business.

The Company also saw that the performance of the construction segment got impacted by COVID-19 across all regions. A significant impact was seen in the international regions, especially in those regions where there was a mandatory shutdown. This resulted in lower productivity, projects went on hold, and there was a delay in the commencement or securing of new projects.

Lendlease feels that its performance in the investments segment would be impacted by a drop in the valuation across the Groups ~A$4 billion investment portfolio which includes the co-investment within the funds platform, Retirement Living Business and other asset positions.

The Company further apprised that the decline in valuation in the second half of FY2020 is projected to have an influence on the Company’s core profit after tax to range in between A$130 million to A$160 million. The retail asset management business within the investment is working with retail partners as they pass through a difficult period. This would have an impact on the operating earnings of the investments segment in FY2020 and FY2021.

After the assessment of these and other impacts, the Group anticipates its FY2020 PAT to be in the range A$50 million - A$150 million.

A quick look at the FY2020 Unaudited Results:

• The Company earlier expected that the restructuring cost estimate to exit the Engineering and Services businesses to lie in between A$450 million to A$550 million on a pre-tax basis. However, it now expects the cost to be around ~ A$550 million pre-tax with circa A$525 million pre-tax expected to be accounted for in FY2020.
• Total unaudited statutory loss is projected to range in between A$230 million to A$340 million after tax.
• Given the projected FY2020 results along with the present economic environment, the LLC is not likely to pay the final dividend. At the same time, the Company also confirmed that a small distribution amount could be anticipated and would depend on the final income of the Trust for FY2020 and paid from the Lendlease Trust.

Capital Raising:

On 20 April 2020, the Company completed the institutional placement and raised A$950 million. Each share under the institutional placement was offered at A$9.80.

On 5 May 2020, Lendlease announced the share purchase plan giving the shareholders with an opportunity to apply for up to A$30,000 of the new fully paid ordinary in the Company. On 29 May 2020, LLC completed the SPP and a total of ~26.5 million new fully paid ordinary shares was issued raising A$260 million.

Through equity raising, the Company would be able to position itself well to continue with the delivery of its development pipeline & grab investment & development chances as markets become stable.

Beginning of FY2021:

Going into FY2021 Lendlease is in a steady financial position with gearing expected to be less than 10% and total liquidity above A$5 billion.

While the duration remains uncertain concerning the COVID-19 crisis, still the Group is well placed to implement the global development pipeline delivery and seize other investment prospects when the time is best.

Stock Information:

By the end of the day’s trade on 08 July 2020, LLC shares settled at A$11.730, down 3.457% from the last close.