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Why Credit Suisse upgraded Lendlease Group shares to a buy ahead of its results

Shares in Lendlease Group (ASX: LLC) may be taking a hammering along with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO), but the stock could soon come bouncing back if Credit Suisse predictions come through.

The broker upgraded the property and construction stock to “outperform” from “neutral” even as it slumped 2.5% to $15.36 during lunch time trade.

That isn’t quite as bad as the 3% drop in the top 200 stock benchmark and Lendlease could come roaring back when it hands in its first half earnings report card on February 21.

This is because Credit Suisse is expecting management to announce a better-than-expected result that will prompt other analysts to upgrade their valuation on the stock.

But don’t expect a jaw-dropper of a result either. Credit Suisse is tipping a 2.3% increase in FY18 earnings per share (EPS) to $1.33 versus consensus expectations of a flat result.

However, this small beat is enough to trigger a bigger re-rating in the stock as confidence towards Lendlease had been dented by write-downs in its Australian construction business.

It is a poor showing on management’s part to not provide any details on the write-downs too, apart from saying it impacts a small number of projects. History has shown you only need one or two projects to go south to bring down an engineering contractor!

This is why a tiny beat in earnings could be enough to turn market attention away from the bad news and to the good – meaning Lendlease’s potential earnings growth in FY19, at least in Credit Suisse’s opinion.

The broker is tipping a circa 18% uplift in Lendlease’s FY19 EPS on the back of a large number of apartment completions across many geographies. Credit Suisse’s EPS estimates for next year and the following year are around 8%-9% above consensus and the broker has a $18.92 price target on Lendlease on top of a forecast net dividend yield of 4.5% for the current financial year.

The diversified company has held its ground better than most of its peers too. Shares in Lendlease have risen 6.3% over the past 12-months, when Mirvac Group (ASX: MGR) has fallen 2.4% and Stockland Corporation Ltd (ASX: SGP) is nearly 10% in the red.

This is probably because Mirvac has greater exposure to capital city apartments, a part of the market under the darkest cloud, and Stockland has material exposure to shopping centres, which are facing structural challenges from increasing online shopping.

Further, Lendlease is in a good position to benefit from the ramp up in infrastructure development spending and is rapidly expanding overseas.

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