Lendlease hit by writedowns but sees recovery in 2024

Lendlease has flagged that it will not hit its straps until 2024, despite taking on big projects like the $3bn One Circular Quay luxury development in Sydney.

Lendlease has flagged that it will not hit its straps until 2024, despite taking on big projects like the $3bn One Circular Quay luxury development in Sydney.

The development giant’s chief executive, Tony Lombardo, is seeking to move the company from its traditional reliance on building, which has been slammed in the wake of the pandemic, and towards becoming a more active funds manager.

But the company will not reap the benefits of this strategy for some years and Lendlease’s result was marred by heavy writedowns on developments and restructuring charges, though it has kept its provisions for the Melbourne Metro tunnel the same.

The shares rose 1c to $10.41.

Lendlease warned its ability to shift its strategy would be influenced by the external environment of higher inflation and interest rates. But it said it could get to its return on equity target of 8-11 per cent from fiscal 2024.

“We remain on track to meet our more than $8bn completion target in fiscal 2024, along with the return on invested capital target for the development segment of 10-13 per cent,” Mr Lombardo said on Monday. “The record level of work in progress, along with our assessment of project fundamentals, provides confidence in achieving both the completion and return targets.”

The company said its return on invested capital from its investments unit was expected to be 6-7.5 per cent this financial year, including $73m from a further sale of 13 per cent of its US military housing asset management income stream.

Lendlease’s own developments account for the bulk of its planned funds, but it was also chasing new projects with partners, including in Brisbane and Perth. Development returns are expected to be 4-6 per cent for this financial year and with work in progress at record levels.

The venture to acquire the $3bn One Circular Quay development will form part of the company‘s targeted $8bn of annual work but it warned that scale benefits and new accounting methods meant profits would be deferred, so returns this financial year will remain below target.

The earnings margin from construction is expected to be just 1.5-2.5 per cent, under the target of 2-3 per cent due to cost pressures and supply constraints.

Lendlease’s core operating profit after tax, showing underlying earnings, was $276m for the last financial year and on this measure earnings per security of 40.1c generated a return on equity of 4 per cent. Distributions per security of 16c represent a payout ratio of 40 per cent.

At the bottom line, Lendlease plunged to a $99m loss as it was hit by writedowns of $333m and $42m of losses in areas which it has sold or is exiting. The investment unit had $70m of gains but this was wiped out by development impairment expenses of $223m, restructuring costs of $119m and intangible impairments of digital activities of $55m.

Lendlease kept provisions it considered “appropriate” to finish its share of the Melbourne Metro project and for potential warranties tied to the engineering unit it sold to Acciona and the business that went to Service Stream.

The company said it was well positioned to chase new projects. Development capital was up from $4.4bn to $5.4bn as development expenditure accelerates along with work in progress.

Invested capital is planned to be reweighted towards investments from fiscal 2024. Lendlease said its cuts were paying off with recurring savings ahead of a targeted $160m but it took $170m in restructuring charges. The strategy switch also hit underperforming projects which incurred an impairment expense of $289m.

“Lendlease had an active year of transactions and remains on track for $8bn development completion target in fiscal 2024. We expect the stock to react positively to the result,” Citi analysts said.