Sometimes, share price falls — even persistent weakness — are an opportunity for an investor that enters at the right time, with more aspects of the company’s position, and the sentiment around it, in the investor’s favour than not.
Here are two situations where I think this situation exists quite starkly.
- Lendlease (LLC, $8.19)
Market capitalisation: $5.6 billion
12-month total return: –26.5%
Three-year total return: –9.9% a year
Estimated FY24 yield: 3%, 26.9% franked (grossed-up, 3.4%)
Analysts’ consensus target price: $9.50 (Stock Doctor/Thomson Reuters, nine analysts), $10.76 (FN Arena, five analysts)
Lendlease is a company that is transforming itself to become more than just a property and infrastructure stock – in particular, its big bet is on the global move to urbanisation. Lendlease has built-up its capability in premium-quality and sustainable office assets, but the major part of the company’s strategy is based on urban regeneration, creating mixed-use precincts that comprise workplaces, apartments and associated leisure and entertainment amenity – with a focus on what Lendlease describes as the key global gateway cities, namely Sydney, Melbourne, London, Milan, San Francisco (with a special emphasis on Silicon Valley, where it is building Google’s flagship campus and developing Google-owned land into $21 billion worth of housing, office and retail assets), Chicago, New York, Singapore and Kuala Lumpur.
Naturally, investors looked askance at office assets when COVID-19 sent everybody scurrying off to WFH — work from home — but Lendlease believes that a much stronger and long-term thematic will be people’s desire for a more liveable and sustainable future, which it can express by designing and building vibrant mixed-use urban precincts with very high attention to detail in terms of the social aspects of how the types of buildings and the civic and social infrastructure work together, to help build connected communities. Lendlease also develops outer suburban master planned communities and retirement living villages.
Interestingly, in terms of WFH, Lendlease said when announcing its December 2022 half-year result in February that its global “workplace” assets — which comprise more than $25 billion in funds under management — are currently 95 per cent occupied, which it said reflects its “leadership in delivering and managing sustainable places and precincts where people want to be.”
Lendlease is structured in three divisions:
- Property development: partnering with large capital partners to design and develop high-quality precincts in key gateway cities around the world.
- Investment management: managing these property assets on behalf of large capital partners such as pension funds, insurers, and sovereign wealth funds for a recurring annual fee.
- Construction: building both external and Lendlease projects.
In terms of contribution to profit, investments is the largest segment, at about 63% in the most recent half-year, followed by development (24%) and construction (13%).
The company describes itself as an integrated business model, always wanting at least two of the three operating segments engaging on the same projects.
The pandemic had a big impact across each of Lendlease’s markets and operating segments, but the profit has recovered and the group has made significant strategic progress.
Another big growth area for Lendlease is its specialisation in build-to-rent projects. These projects involve the development of major residential projects on behalf of long-term capital partners which are then leased out to provide a recurring income for the investor. This is a nascent asset class in Australia but undersupply of housing in cities like London, New York and Chicago makes it a very important property sector to be in, and Lendlease’s skills in this area will stand it in good stead.
Lendlease has a $28 billion global build-to-rent pipeline, having delivered 2,600 apartments in the established Unites States multifamily and United Kingdom markets, and has a further 1,500 in deliver in Chicago, New York and London. In January, Lendlease made a long-anticipated announcement that it was finally entering Australia’s fledgling build-to-rent market, striking a partnership with Canadian real estate investment firm QuadReal Property Group to deliver an apartment building with 443 residences at Brisbane Showgrounds.
Lendlease’s half-year result did not impress at first sight, with a statutory loss after tax of $141 million – better than the $264 million statutory loss a year earlier. That figure included a $200 million provision due to retrospective building safety changes enacted by the British government. But core operating profit came in at $105 million – compared to $28 million in the prior comparable period – and operating earnings per share (EPS) increased 2.7 times, to 15.2 cents.
The company’s funds under management lifted by 8%, to $48 billion: its stated target is to grow this to more than $70 billion by FY26. Its global development pipeline grew by 3%, to $121 billion.
Completions almost doubled in the December 2022 half-year, to $2.8 billion: Lendlease said at the half-year report that it remained on track to achieve its completion target of about $8 billion in FY24, with more than $6 billion of work expected to commence in the current half-year (second half of FY23) subject to market conditions and planning approvals. Overall, despite inflation, supply chain and interest rates risks, the company expects to meet its return on equity (ROE) target of 8%–10% by FY24. The company said that outcomes for all three operating segments are likely to be towards the lower end of FY23 guidance.
Lendlease has struggled in share price terms over the last five years; but I think that from here, for investors prepared to look under the bonnet, the stock looks capable of rewarding them with a robust total return.
Broker Ord Minnett certainly thinks so, with a price target of $14.45 on the stock, while UBS sees $11.15.
- Macquarie Group (MQG, $180.02)
Market capitalisation: $69.6 billion
12-month total return: –8.3%
Three-year total return: 25% a year
Estimated FY24 yield: 3.8%, 40% franked (grossed-up, 4.4%)
Analysts’ consensus target price: $207.00 (Stock Doctor/Thomson Reuters, 12 analysts), $205.96 (FN Arena, five analysts)
Often called “Australia’s homegrown investment bank,” Macquarie Group has made a misnomer of that description in recent years, and should more correctly be described as a global provider of banking, financial, advisory, investment and funds management services. It provides a diverse range of services to clients around the world, and in fact, the investment banking arm of the business, Macquarie Capital, is only a supporting player these days to the main profit generators.
The business is structured in four divisions:
Macquarie Asset Management (a top 50 global asset manager with just under $800 billion of assets under management). This division manages investors funds’ in infrastructure, real assets, equities, fixed income and investment management solutions. As at the first half of FY23, Asset management produced about 31% of net profit.
Banking and Financial Services (MQG’s retail banking and financial services business), which, in Australia has effectively become the fifth pillar in retail banking, with the “big four,” although its operations are smaller. The banking business has total deposits of $125.7 billion, a loan portfolio of $125 billion and funds on platform of $117 billion. As at the first half of FY23, BFS produced about 13% of net profit.
Commodities and Global Markets: a global business offering capital and financing, risk management, market access, physical execution and logistics solutions to a diverse client base across commodities — the energy, metals and agricultural sectors — financial markets and asset finance. This division’s recurring revenue streams produced about 6% of group net profit in the first half, with its less-certain “market-facing” revenue streams generating about 37%.
Then there’s Macquarie Capital, which works in advisory and capital-raising services, in the traditional “investment banking” sense, as well as stockbroking. This division also invests in infrastructure and energy projects and companies, with an increasing focus on transport, digital and social infrastructure. Macquarie Capital’s earnings are all market-facing: the division contributed 13% of net profit in the first half.
But what Macquarie has done in recent years is arrange its business so that roughly half of net profit, coming from BFS and MAM and partially from CGM, is recurring revenue; and roughly half, coming from CGM and Macquarie Capital, is “market-facing.” These proportions will change depending on economic conditions, but the recurring revenue proportion is a very significant buffer, which Macquarie did not have prior to the GFC, when it roamed the world effectively making market bets, backing its people’s deal-making and investment skills.
Macquarie now has excellent earnings diversification both by earnings source, and geographically. Also, the group Macquarie has become the market leader in infrastructure projects, for both financial advice and as a fund manager, and it is coupling this infrastructure expertise coupled with an increasing global focus on energy transition investments, which should enable it to benefit from the “energy transition” tailwind.
Best of all, Macquarie looks to be offering great value at the moment. Broker Morgans has a price target of $222, implying 23% upside to the current price; Morgan Stanley is even more optimistic, expecting to see the shares at $231, or 28% higher than at present. And there is a potential 4.4% grossed-up yield to buttress the capital-gain prospects.
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