Lendlease hit with please explain after downgrade prompted share slide

The developer’s surprise downgrade prompted investors to flee, and now the stock exchange wants answers.

Global developer Lendlease has been hit with a “please explain” notice by the Australian Securities Exchange after issuing a surprise earnings downgrade in its results last month.

The company’s shares plunged after it gave a tough view on its outlook, prompting major investors on its register to call for more urgency in turning the troubled company around.

Lendlease fell to a $136m first half loss and shook investor confidence as it downgraded its outlook, with activist investors Tanarra Capital and HMC Capital pressing for more action.

The disappointing results cut against the grain of much of the property reporting season and the stock fell by about 17 per cent in the days after the results. Lendlease shares have slightly recovered and closed 6c lower at $6.27 on Monday.

The developer is now being urged to make deeper cost cuts and sell off non-core businesses, ranging from its stake in retirement, holdings in China and US construction businesses, but has been hit by the freeze in global property markets.

In a blow to the company, the ASX queried the timing of the company’s unexpected cut to its forecasts, playing into criticisms from dissident investors, who argue Lendlease has structural problems and needs major restructuring and simplification.

The company, led by managing director Tony Lombardo, revealed a downward revision to fiscal 2024 return on equity guidance from the lower end of its 8-10 per cent range to 7 per cent.

“We believe this to be the primary driver of the Lendlease security price decline,” the company said.

Lendlease insisted it first became aware of the information about its earnings prospects when preparing and finalising its financial results. It told the ASX board and committee meetings started on February 14 and were scheduled to be completed on February 19.

As late as December 18, Lendlease had publicly expected to maintain its earlier guidance for the financial year.

The company said on Sunday, February 11, outside its results preparation process and after papers had been issued for the board meetings, senior finance managers received updated financial forecast information from some offshore business units which “suggested that certain transactions may be at greater risk of execution being delayed into fiscal 2025 than had been understood and reflected in Lendlease’s [first half] results preparation”.

While it did not reveal which areas were at risk, the company has been seeking out partners and weighing the future of some British schemes.

The company revealed the “new information” was inconsistent with figures used in preparing board papers.

In a sign of difficulty in managing its complex global empire, the company said management “promptly interrogated” the information and any potential impact on the guidance previously provided to the market.

The company said this involved “interrogating the information” garnered and holding discussions with people offshore to better understand the reasons for the switch. It also analysed various scenarios and pathways for fiscal 2024 earnings factoring in the new information.

Lendlease said it considered the “increased uncertainty” of expected cash receipts in the second half, noting higher than expected funding costs, and a delay in other income producing investments.

In a reference to the behind the scenes shift, the company said work was done “expeditiously” over the week of the Lendlease board meetings.

The analysis was shared with the board on Friday, February 16, ahead of the results being announced on the following Monday before the market opened.

“Until that time Lendlease did not have sufficient certainty to provide public comment,” it said. Lendlease insisted its investments-led strategy is progressing, with continued growth in funds expected, despite it still selling down assets.

Development earnings are expected to further recover, with target completions more than doubling this financial year to over $8bn, underpinned by big ticket projects like One Sydney Harbour at Barangaroo, and a further recovery in settlements from housing estates.

Lendlease said it would also continue to explore capital partnering and in construction it is banking on margins improving and noted cuts in its global workforce are expected to deliver a pre-tax benefit of about $60m to core operating profit this financial year.

Attention is now turning to company’s May strategy day, where Lendlease will provide updates on targets, such as development completions and plans to speed up having less capital tied up in development.

Morgan Stanley analysts said, after the results, Lendlease had previously said while its 8-10 per cent return on equity would be met from this financial year onwards, it had clarified in a bull cycle this will be exceeded, but during tough times, it would be below this range.

“Capital markets are unhelpful, and investors should expect target alterations in May,” Morgan Stanley said.