Construction giant Lendlease Group (ASX: LLC) reported its results yesterday, posting a net loss of $310 million in FY20. Like most companies with international operations, this has been partly due to its exposure to markets with mandated coronavirus shutdowns. However, the company also posted a $368 million cost for the planned exit from its engineering division. In addition, its investment portfolio also suffered a reduction in valuation due to market conditions.
Lendlease financials
While the company did post a $310 million dollar statutory loss after tax, $212 million was in 2HFY20. This underlines the impact from the coronavirus. In addition, about 207 workers had tested positive to the virus but fortunately none had died. However, its core business delivered a profit after tax of $96 million. The company's core business is the construction, investment and development of real estate properties.
Impacts to production came mainly due to mandated shutdowns, reduced productivity in construction, and delays in conversion to new projects. Moreover, some of these impacts will affect 1HFY21. In particular the exit costs for the sale of the engineering business are likely to blow out to $550 million, which is the top end of previous guidance estimates.
Despite the poor conditions, the company managed to complete several large scale projects and initiatives. For example, it completed the development of Paya Lebar Quarter, Singapore, adding $3.3 billion of funds under management. It also listed the Lendlease Global Commercial REIT in Singapore. It will also retain 3 engineering projects: NorthConnex, the Melbourne Metro Tunnel, and Kingsford Smith Drive.
At the time of writing, the company has a very strong balance sheet. Its 5.7% gearing is very low for any company in the real estate sector. Moreover, it has a total liquidity of $5.8 billion, which is $1.6 billion in cash, and $4.2 billion in undrawn facilities
Strategic position
The company has been able to fortify its core business during the year. Its development pipeline is up by 48% to $113 billion, with 2 additional major urbanisation projects secured. These projects have a total estimated end value of approximately $37 billion. They are Thamesmead Waterfront in London for $15.1 billion, and the San Francisco Bay area project for $21.8 billion.
The company has also secured investment partner initiatives including the entire precinct for the Milano Santa Giulia in Milan. In addition, it has secured partnerships for the Victoria Cross over station development in Sydney, and Barangaroo South: One Sydney Harbour Tower 1. The estimated development end value of these projects is $7 billion.
Lastly, Lendlease has withdrawn its services business from sale until such time as the market improves. Even though this is part of its non-core business, it has also secured new work worth $1.4 billion.
Lendlease managing director and CEO, Steve McCann said:
Notwithstanding the challenging environment, the Group advanced its strategic agenda in FY20. Significant progress was made on growing and converting the development pipeline, including securing additional major urbanisation projects, achieving important planning milestones and creating new investment partnerships to support projects moving into delivery. The Group has made good progress in finalising the sale of the Engineering business.
Foolish takeaway
Lendlease is truly one of the world's giant construction companies. The mandatory shutdowns that followed the rapid onset of Covid-19 caught the company unprepared. Nevertheless, it has strengthened its balance sheet, filled up its development pipeline, and secured new work worth billions. I think the company is likely to see a recovery of its business, rather than a prolonged downturn.
With a current market valuation of $8.04 billion it is selling at approximately book value per share. However, this doesn't take into account the healthy pipeline of work it has in front of it. The current Lendlease share price is selling at a price-to-earnings ratio of 8.62, and has a trailing 12-month dividend yield of 5.14%, I think Lendlease is an attractive opportunity for solid dividend payments and moderate share price growth over the next 3–5 years.
