Macquarie analysts believe a sale by Lendlease of a 50 per cent stake in its communities business could ease concerns by the market that the Australian developer and property investor will need to raise capital.
The Australian revealed this year that Macquarie Capital had been tapped for a potential sale of 50 per cent of the business after the company flagged in its results that it was considering options for the unit.
The book value of the business at December was $900m, but the analysts said that assuming the value was $1.7bn, as tipped by The Australian earlier this year, they estimate Lendlease could recognise a $285m profit on the sale of half of the business, which would be at least 51 per cent accretive.
“In our view, the sale of Communities would be a positive for the medium-term deployment target, despite the one-off nature of the profits, as well as allay any market concerns around the need for an equity raise,” the analysts said in a research note.
Macquarie analysts believe that a sale will be 45 per cent accretive to net core profit after tax in the 2024 financial year.
They estimate $46m of divested profit after tax and that a return on invested capital target of 10 to 13 per cent and a return on equity target of eight to 10 per cent in the 2024 financial year could be achieved, albeit driven by one-off profits.
This compares to the analyst's current forecasts for the 2024 financial year of 9.3 per cent and 8.1 per cent respectively.
“If achieved, we believe focus will shift on being able to repeat this into the 2025 financial year.”
Partially offsetting this would be the loss of 50 per cent of the future profits from the business.
Lendlease is aiming to spend $12bn by fiscal 2026, and analysts said that this implied it would need to spend $1.7bn from December.
“With the estimated sale of Communities potentially generating about $285m of capital, or $200m of retained earnings given a 30 per cent payout ratio, we forecast pro forma gearing could be 19.7 per cent post-the recent sale of an interest in the military housing asset management income stream, and within the target range of 10-20 per cent.”
At its half year result delivered in February, Lendlease told the market that its gearing was 16.8 per cent and its net debt was $2.6bn.
Among the parties believed to have shown interest in the stake are Stockland and pension funds.
As reported by The Australian in April, the Lendlease portfolio of 14 land estates is one of the largest in the country with a pipeline of about 45,000 lots and focuses on developing outer suburban masterplanned communities.
The company is also targeting new projects at a time higher immigration levels drives housing demand.
It has 7000 land lots in Victoria, 29,000 in Queensland, 6100 in NSW and 1250 in Western Australia.
Meanwhile, Macquarie analysts say that should Stockland buy the stake, a deal would be about 4 per cent accretive to its funds from operations and add about 1 per cent to its valuation.
It would establish scale for its new master-planned communities joint venture with Mitsubishi Estates Asia and drive future growth.
Analysts believe that any acquisition would be through the joint venture.
Lendlease shares were trading at $7.85 at midday Wednesday, taking its market value to $5.4bn.
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