A big-name company all but forgotten among investors is now “one of the most compelling opportunities on the ASX today”.
That’s according to Firetrail Investments portfolio manager Blake Henricks, who reckons that Lendlease Group (ASX: LLC) has made “significant progress” in creating shareholder value for the coming years.
“Lendlease is a global leader in property development and investment management,” he wrote in a memo to clients.
“Their expertise and reputation in property development has seen the development pipeline grow to over $110 billion today.”
LendLease is a name familiar to Australians on construction sites, but it also has two other arms — property development and investment management.
Why are LendLease shares cheap right now?
Shares for LendLease have lost more than 11% this year so far. In fact, that’s about the same price change experienced over the last 5 years.
There were multiple reasons for this “poor experience” for investors, according to Henricks.
“Lendlease began reporting cost overruns and issues at its engineering projects in 2017,” he said.
“Several issues within the division such as tunnelling in North Connex, construction delays at Melbourne Metro and the recent provision on completed legacy projects has resulted in losses of almost $1 billion.”
And of course, COVID-19 hit the company hard too.
“Due to COVID, LendLease has had to pause the development of some of its major urbanisation projects,” said Henricks.
“Property sectors like office[s] have seen a slowdown in tenant demand which has negatively impacted near term earnings.”
Then why is the future brighter?
A big factor is LendLease’s sale in late 2019 of its engineering division to Spanish giant Acciona SA (BMZE: ANA).
“We believe that the engineering business has been a major reason [for] the firm’s financial underperformance, in addition to the large valuation discount applied to the total business by the market,” said Henricks.
“Exiting engineering has created an opportunity for Lendlease to simplify its business and focus on property development and investment management.”
He added the environment for attaining planning approvals and capital partners has much improved.
“Over the last 3 years, project wins have accelerated, and the development pipeline has grown from $71 billion to over $110 billion,” Henricks said.
“Importantly, many of these projects have been secured with large capital partners, reducing the capital intensity and sharing the risk involved in major developments. Lendlease’s capital partnership model also allows them to leverage their strong relationships with large investors and institutional partners to accelerate future projects.”
“Today, Lendlease has $36 billion in Funds Under Management (FUM) which is expected to grow to over $80 billion in the coming years,” said Henricks.
“In our view, investment management could account for around 50% of earnings in the next 5 years, compared to an average of 31% over the past 5 years.”
LendLease shares were up 1% on Thursday, to close the session at $11.79. The stock has a current dividend yield of 1.55%.
Both the Firetrail Australian High Conviction and Firetrail Absolute Return funds hold LendLease.