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Company: Lend Lease Corp Ltd 


Share Price: $10.11

Market cap: $4.66bn

Recommendation: ‘Hold’

Recent months have seen thoughts of economic recovery filter through to the property sector. Fears of a prolonged malaise in property values have abated, no more so reflected than in the recent narrowing of NTA discounts amongst ASX listed property trusts.

At the forefront of the recovery is Australia’s first listed property stgeloper, Lend Lease Corporation. Having witnessed its fair share of industry cycles, its resilience during the financial crisis closes yet another chapter in its long proud history.

These bloodlines trace back to 1958, when the company was founded as a shareholder funded vehicle to finance and control the building projects of construction entrepreneur G.J. Dusseldorp. The company would make loans to Dusseldorp’s construction firm, Civil & Civic, to fund projects through the stgelopment stages. Upon completion it would assume ownership and be charged with finding tenants and leasing unsold portions. Hence the name, ‘Lend Lease’.

In its modern form, the company’s operations span construction, property stgelopment, and pure ownership. During 2009 these activities saw the company post the first loss in its 50 year history. But while it didn’t escape the global property slump, low debt levels throughout the downturn ensured the company remained crisis free overall. A look beneath the sheets also reveals that contrary to first impressions, Lend Lease’s FY09 performance was relatively strong.

The reported loss of $653m was primarily driven by ‘non cash’ balance sheet write downs on inventory and goodwill. The culprits were stgelopment properties acquired prior to the UK housing slump. The fall in property values which subsequently transpired meant the company had to reduce the carrying value of these assets on its balance sheet, resulting in a loss. Ignoring these valuation adjustments, profitability remained very strong. Net operating profit after tax was $307.5m. Although it was down 29% for the year, the declines were weighted towards one division (investment management) and restructuring expenses aimed at reducing the company’s overall cost base.

Investment management earnings fell 79% to $28.9m, staging a dramatic about turn in its overall contribution to the company. After being Lend Lease’s second largest profit driver in 2008, accounting for 26% of operating profit, investment management made the smallest contribution in 2009, with its share of operating profit just 7%. Nonetheless, the outlook for the company’s fund managers appears promising. Obliteration throughout the property sector has seen investors flock towards well established, trusted investment managers like Lend Lease.

Therefore against the tide of falling property values, new net inflows of $1.9bn saw Lend Lease’s funds under management actually increase during the year by 6.5% to $9.9bn. Investment management income is typically driven by the level of funds under command, so this influx bodes well for the division’s future earnings.

As investment management’s 2009 performance was as bad as it gets for Lend Lease, we are optimistic about the company’s future prospects.

Across other divisions, 2009 performances were relatively strong. Falls in its retail and residential stgelopment units were contained to less than 12%, while operating earnings for its Bovis construction arm and Public-Private Partnership (PPP) unit actually increased. These performances are very solid. The Bovis construction arm is Lend Lease’s largest revenue and profit driver. During FY09 operating profit rose 12.6% to $168.9m, while the PPP arm reported even strong growth of 26% to $74.4m.

Granted, as these earnings are driven by long lead time projects, recent performances may not fully reflect current market conditions. However the risks of a lagged impact are significantly reduced in light the sector’s recent recovery. Government induced social infrastructure spending is picking up the early slack in construction demand, while strong new money inflows to the investment management arm should ensure a rebound in what was the company’s worst performing division for FY09.

With gearing levels still very low, Lend Lease is now set to capitalise where many of its peers capitulated – on the balance sheet. A swathe of distressed property assets are still looking for a good home, and its flexible funding position, given Lend Lease the luxury of being able to ‘pick and choose’.  

Tim Morris is an analyst at wise-owl.com. Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.


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