Morningstar | We See Continued Near-Term Risk for Lendlease, but Maintain our AUD 15.20 FVE
We reiterate our AUD 15.20 fair value estimate for no-moat Lendlease following transfer of coverage to a new analyst. Shares screen as slightly undervalued. While there remains near-term risk from construction and engineering delays and cost-blowouts, we remain optimistic about the firm’s fund management operations and growth through urban regeneration.We forecast 2% to 3% long-term revenue growth in Lendlease's construction segment (outside of its planned wind-down of the engineering business), reflecting continued progress on the firm's AUD 70 billion development pipeline. We see EBITDA margins averaging about 2.7%, in line with historical rates, but 10% below the bottom of the firm’s target range of 3%-4%. We expect this business to generate 17% of total EBITDA by fiscal 2028.
Lendlease's development revenue will likely remain lumpy, owing to staggered completion dates of large projects. While we expect declining Australian revenue over the next five years, we anticipate strong growth elsewhere, driven by a new retirement living development in China, a joint venture with Softbank in the U.S., and strong results in Europe. Over the long run, we expect sales growth to average about 3.5%, in line with global GDP. However, we forecast EBITDA margins declining to about 17% from 21% in fiscal 2018, as rising interest rates mute profitability. We forecast this business’s long-run EBITDA making up 35% of the total.
For Lendlease's investment management division, we project third-party assets under management growing at about 8% annually, slowing from recent double-digit levels, while the firm's rent from co-owned properties grows at about 2.5% per year. We also assume the firm will generate a 7% yield on capital deployed to internally developed assets. We forecast a moderation in gains on asset sales going forward as the stimulus of falling interest rates abates, but still we see this segment contributing nearly half of Lendlease’s EBITDA in fiscal 2028.
LendLease operates a regional management structure in Australia, Asia, Europe and the Americas. Co.'s segments include: Development, which is involved in the development of communities, inner-city mixed-use developments, apartments, retirement, retail, commercial assets and social and economic infrastructure; Construction, which provides project management, design, and construction services, predominantly in the infrastructure, defence, mixed-use, commercial, and residential sectors; and Investments, which includes a wholesale investment management platform and also includes Co.'s ownership interests in property and infrastructure Co-Investments, Retirement Living and U.S. Military Housing.
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