The Lendlease Group (ASX: LLC) share price is rising again on Tuesday.
In afternoon trade, the ASX 200 real estate stock is up 1.5% to $5.59.
This means its shares are now up almost 8% since this time last month.
But if you thought the gains were over, think again. That's because the team at Macquarie Group Ltd (ASX: MQG) believes that Lendlease shares are dirt cheap at present.
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What is Macquarie saying about this ASX 200 real estate stock?
Macquarie notes that Lendlease has announced the sale of six UK development assets into a 50/50 joint venture (JV) with The Crown Estate and a $1.2 billion mandate with the NPS.
The JV will release $300m of capital from the ASX 200 real estate stock's longer-dated international development book at a $10 million to $30 million premium to book value.
The broker also highlights that executing against its FY 2025 capital recycling target of $2.8 billion, this brings the company closer to potentially launching a buyback in FY 2026.
'A good outcome'
While not necessarily its preferred outcome, Macquarie has described the news as a good outcome. It said:
50/50 JV gives LLC the right, but not obligation to pursue vertical development of new investment product across BTR, life sciences, and office to support the international investment management platform.
We would have preferred a complete exit from these development assets rather than selling them into a 50/50 JV, but a good outcome nevertheless in releasing capital early, slightly above book value. LLC has not made any commitments to date on pursuing vertical development and will assess this in the future against its capital allocation framework.
As mentioned above, it feels that this is potentially setting the stage for a major share buyback. It adds:
This additional release of capital brings LLC closer towards launching a security buyback of up to $500m, which requires: 1) delivery of $2.8bn of capital recycling; and 2) comfort in achieving gearing within the 5-15% target range by end-FY26 (gearing is expected to trend lower at FY25 vs 1H25 of 27%). LLC would like to see further progress on three key processes including Australian Retirement Living, Ardour Gardens and TRX which are ongoing with interest from potential bidders on each of those.
Big return potential
In light of the above, Macquarie has reaffirmed its outperform rating on the ASX 200 real estate stock with an improved price target of $7.79.
Based on its current share price of $5.55, this implies potential upside of 40% for investors over the next 12 months.a 3.3% dividend yield is also expected over the period, boosting the total potential return beyond 43%.
It concludes:
This deal is evidence that the strategy is a drawn-out process with a degree of valuation/earnings uncertainty. However, the focus should be on the retained IDC businesses for which we will get an update at the FY25 result.
