LendLease shares took a whacking yesterday for a downgrade, which wasn’t a downgrade and the sale of part of a key asset in a division that drew the ire of a leading analyst group.
Lend Lease shares slumped 10% yesterday after UBS downgraded the property manager after it sold some of its stake in its retirement living business and let slip in the same announcement that its Australian construction business was faltering. The shares ended at $16.75, down $1.86.
In a late statement to the ASX on Tuesday, LendLease said it had sold a 25% stake in its retirement living business for $450 million to Dutch fund manager APG Asset Management.
The sale forced Lend Lease to take a $35 million net loss, after writing down deferred tax assets associated with the business.
But buried in the statement was the shock warning of an underperformance in its Australian construction business. CEO Steve McCann warned in Tuesday’s statement that while the group had made “solid progress” after its strong 2017 financial result, next year’s result would be impacted by “underperformance” in the Australian construction business.
"The composition of the FY18 result is expected to be impacted by underperformance in our Australian construction business which relates to a small number of engineering projects,” he said on Tuesday.
"As a result, the HY18 EBITDA contribution from the Australian construction business is expected to be lower than the prior corresponding period. We expect this underperformance to be offset by outperformance in other parts of our business. This reflects the benefits of the Group’s internationally diverse portfolio across its Development, Construction and Investments segments which provides business model resilience.”
That saw UBS move to cut its rating on Lendlease.
“We downgrade LendLease to ‘neutral’ post a period of significant outperformance (+32 per cent vs market +4 per cent) and an earnings downgrade/composition change in FY18," UBS said in a note to its clients yesterday.
The note highlighted what it called "disappointing" news that pretax earnings for the year ending June 30 would underperform.
"We have downgraded earnings estimates in FY18/19/20 by 6 per cent/2 per cent/2 per cent" reflecting the $35 million loss on the sale of the retirement business this year and the loss of retirement investment income subsequently, the bank said.
"Ongoing setbacks remind the market that LendLease is not a market multiple business (PE is 13.2x trading at a 25 per cent discount to the industrial ex financials which we believe is fair). Downgrade to neutral from buy,” the broker said.
The sale of the retirement stake isn’t ‘new’ news as such as Lendlease said last month that it was “exploring the introduction of capital partners to help fund the growth of the business”.
Lendlease has $1.738 billion invested in its retirement ownership business.
A write-down of the value of deferred tax assets in the retirement business and transaction costs would see the deal result in a net loss after tax of about $35 million, managing director Steve McCann said in Tuesday’s statement.
“Overall our business continues to perform well. We expect the strength of our diversified business model will offset the underperformance in our Australian construction business,”Mr McCann said.
“The partial sale of our retirement living business further strengthens our financial position and the joint venture with Softbank in the US telco infrastructure space adds to the diversification of our business.”
No matter how Lendlease spin it and what Mr McCann says, the bottom line is that news of problems in the Australian construction business is a surprise and investors hate these types of shocks.
In 2016-17 Lendlease reported earnings before interest, tax, depreciation and amortisation (EBTDA) of $A1.2 billion and Australian construction EBITDA of $A201 million.
