Lendlease rallies on post-Brexit relief

“People are confident because they haven’t announced any further issues with engineering and services,” said Jeffries analyst Sholto Maconochie.

“FY20 sees profit get smoked as they book all the impairments this year. So next year should see a return to growth.”

Investors rewarded the company with a 6.7 per cent boost in the share price, lifting Lendlease stock $1.17 to $18.60 and buoying a company that has underperformed its peers in the S&P/ASX 200 Real Estate (Sector) Index over the past three months.

Part of the relief felt by investors also came from an apparent end to the UK’s long-running Brexit uncertainty. The UK accounts for about 30 per cent of Lendlease’s swelling global pipeline of urban regeneration projects and the British Parliament’s vote last month on an exit plan from the European Union gave investors confidence about the projects.

“This gives more confidence from an investing in the UK perspective,” Mr Maconochie said.

“Investors sitting on the side didn’t want to make capital decisions while there was that uncertainty.”

Lendlease demonstrated that confidence on Thursday, saying it and Canada Pension Plan Investment Board (CPP Investments), partners on the £2.5 billion ($4.8 billion) Elephant Park urban regeneration project in south London, had agreed to each invest an extra £40 million to build an 18-storey tower of build-to-rent accommodation in the 28-acre (11.3ha) project.

But the company is not immune to other global dynamics. Lendlease said it had also, like other builders in Australia, issued notices of possible delay on building sites – including the Barangaroo Crown tower in Sydney – as a result of risks to the building materials supply chain posed by the COVID-19 virus, which has shut Chinese factories.

Construction has also failed to restart since the lunar New Year holiday at Ardor Gardens, a 900-unit retirement living village the company is building outside Shanghai, chief executive Steve McCann said.

In the face of a half-year result that showed lower returns in development and weaker profit in its investment and construction businesses, Lendlease encouraged investors to look ahead to what was coming.

“Our core segments are well placed for medium-term success,” Mr McCann said.

“The development pipeline has increased significantly to $112 billion, with a growing number of major urbanisation projects in our international gateway cities across the US and Europe in particular.”

Development return on invested capital slipped to 7.3 per cent in the first half from 7.5 per cent a year earlier – and below its 10-13 per cent target range – limiting the gain in after-tax profit to $186 million from $179 million even as invested capital rose.

Net profit of its investment arm fell 11.9 per cent to $199 million as invested capital jumped to $3.9 billion from $3.4 billion and net profit on construction fell almost one-quarter to $59 million as revenue from that division suffered a 16.7 per cent decline to $4.33 billion.

While Lendlease last year declared the housing cycle in the eastern seaboard-led market had troughed, the recovery will still take time. The developer, which targets between 3000 and 4000 home settlements annually, said it would fail to meet that level again this year, after settling 2523 last year.

“This year will be a bit lower,” chief financial officer Tarun Gupta said.

“We anticipate as the cycle improves we will get back to the long-term target.”

Mr Gupta also declined to disclose any details about performance of the company’s unlisted APPF Retail fund, which in November sold a half stake in the Westfield Marion mall in Adelaide’s southern suburbs and which is also selling its half stake in Brisbane’s Westfield Carindale in response to redemption requests by investors.

“As you know across the board sentiment is poor for retail,” Mr Gupta said. “The returns in that fund and across the retail sector are being impacted by falling valuations.”

The combined divisional performance left EBITDA earnings little changed at $556 million for the first half from $557 million a year earlier, even as net profit on the company’s three core divisions fell to $308 million from $355 million.

After-tax net earnings for Lendlease Group as a whole jumped to $313 million from just $16 million a year earlier, when the company took a $339 million hit on the troubled engineering division it has since agreed to sell in part.