Lendlease to Exit Global Ambitions: What Prompts the Property Giant's Pivot?

Moomoo News AU wrote a column · May 31, 2024 07:37

$Lendlease Group (LLC.AU)$ has announced plans to exit all international property development and sell its overseas construction divisions on Monday, marking the largest shake-up at one of Australia's largest real estate groups since the sale of MLC to the $National Australia Bank Ltd (NAB.AU)$ over two decades ago.

The company plans to exit or sell more than $4 billion worth of international works within the next three years, ending its decades-long pursuit of being a globally significant property builder.

Benefiting from this strategic pivot, the company's share price surged 8% on Monday. However, its current market capitalization of AUD 4.13 billion is still significantly almost 70% below its five-year high.

Lendlease to Exit Global Ambitions: What Prompts the Property Giant's Pivot?

Lendlease and its global business strategy

Lendlease, which was previously recognized as one of Australia's largest and most prominent corporate brands, now operates as an integrated real estate and investment company with a worldwide reach that spans across Australia, Asia, Europe, and the Americas. The company's operations comprise of Development, Construction, and Investments segments, and it is involved in a wide range of projects that encompass apartments, retail, retirement villages, commercial, and social developments.

In 2009, when Steve McCann was appointed as the CEO of Lendlease, it marked the beginning of the company's pursuit to establish a global property empire. With low interest rates and increasing property prices worldwide, Lendlease was encouraged to pursue this strategy. As of the end of 2023, the company's capital comprises 36% from Australia, and 22% from Asia and Europe respectively in offshore capital, with the Americas accounting for 20%.

What prompted Lendlease's strategy transformation?

1. Commercial real estate under pressure

The commercial real estate market is under pressure due to a confluence of factors in recent years:

• Amid trade tensions and a slowing economy, corporate expansion plans have been delayed or scrapped, leading to a decline in demand for office space. Additionally, the retail sector's downturn has directly impacted the rental rates of shopping centers.

• Following the pandemic, a shift towards flexible working arrangements by some companies has lessened the reliance on physical office spaces, resulting in decreased demand for traditional work environments.

• The rapid growth of e-commerce presents a significant challenge to brick-and-mortar retail. Changing consumer shopping habits have led to reduced foot traffic in malls and physical stores, higher vacancy rates, and a decline in rental income.

2. Earnings disappointment

In February, the global developer reported a sharp 42% decline in core operating profits, which plummeted to AUD 61 million, a mere third of the expected figures, attributed to weak development revenue. The company also significantly slashed its earnings outlook. In response, investors punished Lendlease, with the shares tumbling 14 percent on the day of the announcement.

3. Shareholders call for action

Long-term investors of Lendlease are disappointed with the company's performance, as the share price has dropped by 50% in three years compared to the market return of approximately 28%. Following the release of the company's performance report in February, shareholders have demanded a concrete change in strategy.

Two weeks ago, Lendlease chairman Michael Ullmer announced his retirement at the end of the year following calls from one of its largest shareholders, Aware Super, for him to step down. Mr Ullmer said,

We recognize that our security price performance and securityholder returns have been poor as we have faced structural challenges and a prolonged market downturn. We need to take significant action at an accelerated pace to deliver value for our securityholders, capital partners and customers.

Earlier this month, Simon Mawhinney from Allan Gray, which holds a 6.2% stake in Lendlease, described the company's recent performance as "diabolical."

It has massively underperformed almost any comparator company you can think of…It’s the kind of performance that needs to change.

Market perspectives

As the strategic restructuring of its business commences, a new Lendlease is emerging. This revamped Lendlease will hone in on its more profitable Australian operations, which include fund management and the development of significant property projects.

Analysts at UBS have suggested that Lendlease's share price reaction on Monday, which rose by 8%, reflects the broad market support for the plans outlined. They also noted that the tone and timeframes indicated were better than low market expectations. Furthermore, fears of a capital raising were likely allayed with talk of a $0.5bn buyback funded by the initial proceeds from $2.8bn of "on market" asset sales.

Citi analysts have also expressed optimism about Lendlease's new strategy, stating that it should leave the company in a much better position with significant value upside. Citi emphasized that execution is key for the shares to re-rate to $8.00, and they retain a Neutral rating and $6.90 target for the company.

We estimate potential for the share to re-rate to about $8 per share on successful execution of asset sales. However, the complex nature of closing out of businesses will lead to investors being cautious near term.

However, certain macroeconomic risk factors also warrantattention. It's important to note that with inflation levels showing signs of a resurgence over the past two months, the Reserve Bank of Australia (RBA) even considered raising interest rates at the May Federal meeting. At present, the April CPI data has shifted the market's perception of the timing of the first rate cut backwards by 4 months, from June 2025 to October 2025. As the real estate and construction industry is sensitive to interest rates, the prolonged high levels of cash rate could potentially have an adverse effect on Lendlease.

Source: Yahoo Finance, AFR, ASX, Lendlease

By Moomoo News Marina

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