Worries about Australia's housing bubble have caused Lendlease Group (ASX: LLC) to give up morning gains on the back of a pleasing profit result with its share price tumbling 2.1% to $16.21 in late afternoon trade.
The latest data from the Housing Industry Association may have something to do with the abrupt turnaround in the stock as the residential building body reported that new home sales fell to their lowest level in four years in July as apartment sales tumbled nearly 16%. The sombre figures are adding to speculation that official new dwelling data to be released tomorrow will show that the housing market is coming off the boil.
However, the drop in Lendlease could prove to be an opportune time to buy the stock as I think management delivered a solid full year result with net profit jumping 9% to $758.6 million and the dividend increasing 10% to 66 cents a stapled security.
While management didn't give any earnings guidance, it did indicate that it is aggressively growing its international operations by pursing urbanisation projects in Chicago, Boston, New York and Kuala Lumpur (The capital of Malaysia).
Goldman Sachs is another that is an enthusiast of the stock. The broker noted Lendlease's strong development pipeline of $49 billion and a construction backlog of $21 billion. The pipeline and backlog underpins the broker's net profit growth forecast for the property group of 6% in FY18 and 5% in FY19.
This puts the stock on a price-earnings (P/E) multiple that is just under 12 times (based on Goldman Sach's FY18 earnings forecast) and that is a compelling valuation given Lendlease's strong management track record that I have written about before.
The market might be discounting the stock due to worries about apartment settlements given the amount of speculation that this part of the residential market possesses. However, we are seeing no real signs of trouble with fellow developers Mirvac Group (ASX: MGR) and Stockland Corporation Ltd (ASX: SGP) given upbeat outlooks.
I am not downplaying the risk of a housing correction, but I think Lendlease's earnings visibility, strong balance sheet, international diversification, and low defaults on apartment settlements means it shouldn't be trading on such a low P/E.
These are some of the reasons why Goldman Sachs has included Lendlease on its "conviction" list as the broker rates the stock a "buy" with a 12-month price target of $18.10 (upgraded from $16.95).
Like a few more quality buy ideas? The experts at the Motley Fool have just picked three new high-yielding stocks that are trading on attractive valuations. See below to find out how you can get your hands on this report!
