The S&P/ASX 200 Index (ASX: XJO) stock Lendlease Group (ASX: LLC) has suffered heavily over the last few years. But some investors are seeing value in it now.
For readers that don't know, Lendlease is a business with a market capitalisation of more than $5 billion. It describes itself as a globally integrated real estate group that's involved in the development, design, placemaking, construction and investments to deliver "iconic and enormously successful places".
The company's involved with a number of different developments including "Sydney's award-winning Barangaroo precinct, London's Elephant Park urban renewal project, Singapore's Paya Lebar Quarter, Boston's Clippership Wharf and a $20 billion urban renewal project comprised of four districts in the San Francisco Bay area." These projects are part of its $120 billion global development pipeline, according to Lendlease.
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Why the ASX 200 stock looks cheap
As we can see on the chart above, the Lendlease share price has dropped around 30% over the last year. That's a lot worse than the S&P/ASX 200 Index (ASX: XJO) which has risen by around 3% in the past year.
But, a fall in the share price alone doesn't automatically mean that the business is good value.
Romano Sala Tenna is portfolio manager of Katana Asset Management's Australian equity fund, and he was talking to the Australian Financial Review.
When talking about some of the most underlying ASX 200 stocks in the fund, he named Lendlease, suggesting that it's trading at a "historically low price to book value of less than 0.90 times."
The price to book refers to the company's market capitalisation (or Lendlease share price, in per-share terms) compared to the net asset value (NAV) of the business – it's cheaper than what the underlying balance sheet is supposedly worth.
Investors can buy $1 of Lendlease net assets for less than $0.90.
However, the fund manager acknowledged that the company faces "pronounced headwinds in the short-term and may stay cheap or fall further". He said that the fund has started with a small position with a medium-term lens, and expects to build a larger position over the coming 12 to 18 months as the "macro environment normalises".
What's the view on the ASX share market?
Romano Sala Tenna said:
We have been overweight cash for the best part of nine months. This is premised on our view that consumer spending will recalibrate notably lower at the same time as inflation and higher debt servicing impact production costs. This combination will most certainly drive earnings lower. The piece of the puzzle that we are less certain about is the impact on shares. In an ordinary cycle, declining earnings equate to declining share prices. However, this is already the consensus viewpoint, and the herd by definition is rarely positioned correctly.
Having said this, we do not have the luxury to hold cash indefinitely. Our current intention is to hold our course until the end of May. If we do not see signs of the market rolling over by that time, we will pivot and selectively deploy capital.
