Lendlease profits as development pipeline leaps in value

Investors have backed Lendlease’s offshore growth as its development pipeline leapt in value to $112bn.

Sydney’s Barangaroo project, where Lendlease is selling apartments.

Global building giant Lendlease has revealed its development pipeline has leapt in value to $112bn and it has reaped $1.4bn worth of pre-sales at its prize luxury apartment tower at Sydney’s harbourside Barangaroo precinct.

The company turned in a $313m first half profit and earnings per share hit 55.5c as the company flagged it was growing quickly around the world, even as it warned it would miss settlement targets in its local land estates this year due to the soft market.

Investors are backing the pivot to major offshore projects and the company’s shares rallied as there is more certainty about its London projects in the wake of Brexit. Shares closed up 6.7 per cent at $18.60.

They are also confident that there will be no further write downs relating to the engineering division and chief executive Steve McCann told analysts the company was well positioned to win more work.

The company has come through a rough period marked by its exit from the underperforming engineering business and already locked down major work around the world and lifted its return on equity to 9.8 per cent.

Big projects were secured in London and San Francisco, where Lendlease is working on a major project with Google. All up, the company has a pipeline of $98bn worth of urbanisation projects spanning 21 sites in nine global cities.

$18.60 Lendlease closed up $1.17 p

At the launch of the luxury One Sydney Harbour, Barangaroo, it has secured $1.4bn in apartment pre-sales, including the $140m penthouse amalgamation that smashed local price records.

The company also floated the Lendlease Global Commercial REIT in Singapore and flagged its $112bn development pipeline would help its boost its funds empire in coming years.

Lendlease sold off its engineering business to Acciona for $180m but is still looking to sell its services business after John Holland pulled back from a deal.

Lendlease chief executive Steve McCann said the company had made “significant progress” on its cornerstone strategy focused on global cities.

“The group grew its urbanisation pipeline significantly, completed another world class urban precinct and progressed the sale of the engineering business,” he said.

The company also completed the Paya Lebar Quarter in Singapore, with the $4bn project including three office towers, a mall and more than 400 apartments.

Lendlease has forged into the build-to-rent industry offshore and has a pipeline of more than 1,700 units and has already secured capital backers. It is investigating the sector locally.

In engineering, Lendlease is close to finishing the NorthConnex and Kingsford Smith Drive projects but is still stuck with an exposure to the troubled Melbourne Metro Tunnel Project and is locked in talks with the Victorian government about cost blowouts.

But Lendlease stuck to its previously disclosed estimate to exit both engineering and services of $450-$550m pre tax.

Lendlease chief financial officer Tarun Gupta also pointed to more office and apartment deals that would contribute this year. But he also noted softness in the local land business.

Development earnings are expected to be skewed to the second half of the financial year, and analysts expect sell downs of stakes in office projects in Sydney, Melbourne and Milan.

“Our core segments are well placed for medium term success,” Mr McCann said, pointing to the growing number of projects in the US and Europe.

Beyond the current backlog, there is another $10bn of work for which Lendlease is preferred to win and the company is looking at ways to convert an expected $50bn-plus of institutional grade assets into new funds.

“We are well placed to double our current $37bn of funds under management as this pipeline is delivered,” Mr McCann said.

UBS analyst Grant McCasker said the company had reaped a substantial profit from a partial selldown of its Victoria Cross office project in North Sydney.

He said reiterating the exit costs from the engineering and services business were positive, however the company’s low cash conversion and higher gearing of 15 per cent was negative.

“Lendlease has less flexibility in building out the pipeline – capital partners will need to be introduced earlier and this implies continued profit leakage relative to history and [market] consensus,” Mr McCasker said.