What is the stock?
Lendlease Group (ASX:LLC)
How long have you held the stock?
It has been a long-term portfolio holding and we’ve recently been increasing our position.
What do you like about it?
Perceived complexity masks a relatively stable earnings profile and strong project pipeline ensures earnings visibility. At the 1H17 result, Lendlease reported that 40% of EBITDA was derived from Investment Management. Lendlease has funds under management of $25.7 billion and co-investments of $1.5 billion, providing them with a strong earnings foundation. The pipeline of $49 billion in development and construction backlog revenue of $20.5 billion provides them with earnings visibility and a degree of control that most companies would envy.
How is it better than its competitors?
Whilst it has competitors in individual business segments, Lendlease has no clear competitor, as it is one of the few integrated players globally. It also boasts a strong safety track record in the construction division compared to its peers.
What do you like about its management?
The depth of the management team. Steve McCann has surrounded himself with an impressive leadership team, which often rotates between various roles allowing them to gain further experience that benefits the Company. For example, former CFO Tony Lombardo is now CEO of Asia and stepping in during May 2016 was Tarun Gupta, who was CEO, Property, Australia.
What is your target price and at what point would you sell it?
We think the current discount in the stock is unjustified and that it should trade up to a market multiple.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
LLC has been a solid contributor to our portfolio over the 12 months to June, delivering a total return of +37.1% compared to the ASX300 Accumulation Index return of 13.8%.
Is it a liquid stock?
Yes. Lendlease is liquid, being a Top-50 stock with a market capitalisation of circa $10 billion.
What do you see as value?
The perception of complexity has meant Lendlease is trading significantly below market multiples. On Perennial Value estimates, it is currently circa 30% below the industrials average P/E. The discount not only provides potential upside as the market undervalues their earnings growth potential, it is providing a “cheap” margin of safety as we view their earnings to be relatively more stable than the market perceives. Given the various divisions Lendlease operates, the sum of the parts valuation is significantly higher than the current share price, given businesses such as the investment management division typically trades at a higher multiple than most industrials.
Source: ASX
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