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Lendlease undervalued despite dozing at the digger

Lex Hall  |  13 Nov 2018Text size  Decrease  Increase  |  
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The market has overreacted to the losses incurred by Lendlease (ASX: LLC), and as a result the global developer and builder is undervalued for the first time in three years, says Morningstar analyst Tony Sherlock.

A year ago, Lendlease flagged $200 million in post-tax losses linked to problems in four Australian engineering projects.

It reported last Friday that these losses had increased by a further $350 million because of flaws in project management, risk management and quality control, Sherlock says.

As a result, he has cut the company's fair value estimate from $18.50 to $17.20. It closed the week 17.3 per cent lower at $14.25, and today is trading at $13.50.

Despite the losses, however, Sherlock says the market has overreacted to the news.

"The losses on the engineering projects are definitely negative news for Lendlease," Sherlock said in a note on Friday.

"But we think the market has overreacted, shaving approximately 20 per cent or $1.8 billion off Lendlease’s market capitalisation.”

Lendlease has been a victim of its own strong earnings, prompting investors to ascribe it a high price earnings multiple, Sherlock said.

"The risk is whenever there is a major stumble - as is the case at present - the share price gets severely punished.”

At $13.50, the stock screens as undervalued, Sherlock said. "This is the first time we have viewed the firm as undervalued in at least three years."

construction

Global builder and developer Lendlease is undervalued for the first time in three years

Sherlock says that while the company's pipeline of major projects has expanded, most are in their early stage of delivery and are yet to yield their full benefits.

The company also has a sound balance sheet, with low gearing of 5 to 15 per cent and negligible debt.

This will grow in appeal, Sherlock says, as cash-strapped governments will increasingly return to public-private partnerships to fund growth.

However, there are reasons to be bearish.

Lendlease could have elaborated on the reasons for its losses, Sherlock said, which were put down to lower productivity in the post-tunnelling phase of the NorthConnex motorway in Sydney, wet weather, access issues and remedial work from poor design on other projects.

A review of the company’s engineering division will force a substantial or near complete exit from higher-risk activities, Sherlock said.

As such Sherlock has cut revenue growth expectations for Lendlease from positive 2 per cent for the next four years to negative 2 per cent.

"We expect having had its fingers well and truly burnt, Lendlease will be bidding on and securing far less complicated engineering work than it has in recent years.

"The firm needs to improve the monitoring and managing costs, tracking project progress and identifying and managing risk."

Morningstar's $17.20 fair value estimate implies a fiscal 2019 P/E of 121.3 times and enterprise value/EBITDA of 13.4 times.

 

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Lex Hall is content editor for Morningstar Australia.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

is content editor for Morningstar Australia

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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