The Lendlease Group (ASX: LLC) share price is surging higher and is one of the best performing large caps on our market today.
That’s a welcomed respite as the LLC share price gained 4% to $13.80 in lunch time trade to become the fifth best performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
Only the Costa Group Holdings Ltd (ASX: CGC) share price, Independence Group NL (ASX: IGO) share price, Infigen Energy Ltd (ASX: IFN) and G8 Education Ltd (ASX: GEM) share price are outperforming the engineering and construction group at the time of writing.
The jump in Lendlease’s shares stands in sharp contrast to its 27% plunge over the past week before today’s rebound.
Is Lendlease shares heading higher?
The question now is whether the stock has found a bottom and I am inclined to think it may have after management confirmed at today’s annual general meeting that it has appointed external advisors to undertake a “wide ranging review” of its troubled engineering division.
This division is the source of Lendlease’s problems as it forced the group to warn of a $350 million hit to net profit due to three projects.
The irony is that the engineering business is not even a very significant earnings contributor to the group but has cost shareholders more than $2 billion from the share price crash.
Credit Suisse estimates that Lendlease has a backlog of other engineering projects worth around $4 billion and the market is essentially pricing in costs overruns for 50% of this backlog.
“While this level of cost over-run is not impossible, we do not believe LLC would have to pay anywhere near A$2bn to divest the engineering construction business,” said the broker.
Credit Suisse has upgraded the stock to “outperform” from “neutral” as it believes its share price has been oversold.
While I would prefer management outline a plan to divest its engineering division before buying the stock, it’s pleasing to see that Lendlease is at least proactively exploring options for the troubled business.
Credit Suisse has a $16.20 price target on the stock.
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Motley Fool contributor BrenLau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.