Lendlease to take Covid hit, suffer more engineering losses

New CEO faces baptism of fire as he warns overseas earnings will suffer, and as Lendlease grapples with legacy engineering losses.

The east tower of Lendlease’s Melbourne Quarter project.

Lendlease’s offshore development units have been hit by the coronavirus and it has been slugged by legacy issues from its sold-off engineering division.

The company’s shares slumped by almost 8 per cent to $10.54 in early morning trade giving new chief executive Tony Lombardo a baptism of fire as he cleans up Covid-related problems and he promised a wide-ranging company review.

The chief executive faced harsh questioning from analysts about Lendlease’s model but he is hopeful of a ramp once lockdowns end around the world and the shares came back to close at $11.14, down 2.8 per cent.

The company is sticking to its model of big city projects around the world put in place by former chief Steve McCann, who is now running Crown Resorts. It has struck a series of major property deals in Australia and Italy but it has been hit in Britain where the pandemic has slowed London projects.

In one of Mr Lombardo’s first moves, he has rebased the company’s earnings, saying profit is expected to be $375m to $410m after tax, short of market expectations of close to $470m.

The company has also made provisions for claims on the engineering business which was sold off to Spanish-backed Acciona for $180m. Lendlease said it could take an additional $90m to $175m of after tax losses on engineering, capping a disastrous move into the area.

The company has struck a series of property deals including Mitsubishi Estate taking a stake in the second luxury tower it is building at Sydney’s harbourside Barangaroo, where it is offering apartments into the hot premium residential market.

It has also finalised a deal in Melbourne that will see Medibank shift into a new tower at the Melbourne Quarter development and has sold off that tower to South Korea’s National Pension Service.

New Lendlease CEO Tony Lombardo. Picture: Nikki Short

Lendlease cited the “challenging” operating conditions associated with Covid-19 for its woes but its shares drifted this month as investors grew concerned about its ability to complete projects at a time when many global cities have been forced into extended lockdowns or re-entered lockdowns.

London, where it has billions worth of urbanisation projects, had extended its lockdown multiple times, which had impacted commercial and residential deal-making. Lendlease has been unable to hook an investment partner for International Quarter London and was hurt by weaker rental demand and lower rents on the recently completed residential for rent buildings at Elephant Park in London.

But it won an investment partner has been secured for the Milan Innovation District in Italy.

Lendlease said details had recently emerged in claims relating to historical projects completed prior to the sale of the engineering business.

“While these claims are subject to dispute proceedings which take time to evaluate, the Group anticipates accounting for an additional provision in the range of $90m to $175m after tax in fiscal 2021,” it said.

But it did not blame the problematic Melbourne Metro, its remaining engineering project, which it said had not required any further provisions.

Lendlease said its full year statutory profit was anticipated to be within the range of $200m to $320m after tax and its gearing will be below the bottom end of the range of 10-20 per cent.

Mr Lombardo is undertaking a wide-ranging review covering a restructure of the company but cautioned that Covid-19 was making it tough to do deals. Some analysts are urging the sale of the company’s retirement, military housing and housing estates businesses.

UBS analysts Tom Bodor and Grant McCasker said the downgrade to this year‘s consensus earnings had been expected but the inclusion of some large transactions left questions around next year.

Lendlease’s guidance range of $375m to $410m was helped by a number of large one-off transactions.

UBS said the company had given few details and the mood wasn’t inspiring. “Today’s announcement left little clarity around fiscal 2022 profit drivers, given substantial deals still closed [this year],” the analysts said.