Lendlease looks attractive from a long-term valuation basis, especially relative to other opportunities within the real estate sector.
Although the share price may remain weak until a solution for Engineering &
Services is achieved, we feel the negatives are already priced in.
Based on FY20 earnings, we have the stock trading on a forward yield of 5%.
Lendlease released 1H19 earnings last week and the initial reaction from the market has been negative, with the share price moving lower.
The company indicated the Australian Engineering business is non-core, which suggests we will soon see a trade sale of some description.
In FY20 we see a normalization of the Lendlease business, following the cost overruns in the FY19 results. FY20 we see revenue at $13bn and EBIT at $1.2bn.
FY20 yield is running at 4.8%. Value is emerging, watch the shot-term indicators for a positive reversal.
Lendlease is a current holding in our ASX 100 model portfolio.
The market has discounted LLC share price due to substantial impairments on troubled projects within their engineering business.
The group reports earnings on the 25th of Feb and we expect to hear whether an exit of this business is likely. Investors have lost patience regarding a turnaround and a trade sale or spin-off of the division will be well received by the market.
If confidence is restored and investors can look through the short-term troubles, LLC could re-rate back towards $15.00
Our Algo Engine has the following group of REITs under buy conditions CHC, DXS, GMG, GPT, LLC, SCG, & VCX. These names all sit in the ASX 100 model portfolio.
Chart Hall Group is the best performing REIT within our models, up 54% after holding it for 574 days.
REITs have performed very well in recent weeks, due to the moderating outlook for bond yields. If yields remain under pressure, defensive asset
classes, such as A-REITs and utilities will outperform through 2019.
A slowing global growth picture, low bond yields, rising equity market volatility are generally seen as positive catalysts for defensive sectors. The recent run up in these names means much of the value has already been captured. Therefore, we recommend investors use covered call options to enhance the income return.
As an order of preference, we feel large scale logistics, followed by office and then residential.
EPS growth for the sector is running around 4 -5% and dividend yields are near 5% also. Add a covered call and you’re able to achieve 10% annualised cash flow.
For more detail on covered call strategies please call of our office on 1300 614 002.
SLF Property ETF
Lendlease’s engineering and services division announced a further $350 million write down last week, which brings the NorthConnex tunnel project write-offs to more than $700 million.
An extraordinarily large number on a project that offers a total revenue of $2 billion. As a result of this, the board of Directors are currently considering if the division is “core” to the Leanlease operation.
Currently the division, contributes less than 15% to LLC’s overall earnings.
The markets reaction has been brutal and with the stock down over 20% in the last two days.
At under $14.00, we consider this a unique long-term opportunity to accumulate LLC at a discounted valuation.
In Monday’s webinar we looked at a number of high conviction ideas and positioned buy-side entry levels in oversold names.
The following stock codes are a reminder of companies that should have made it onto your watch lists:
ANN, LLC, AMC and IRE
Lendlease, ASX, CSL and Aristocrat are names that we covered in Monday’s Opportunities in Review webinar.
Again, we draw your attention to these high quality businesses that have seen a recent correction in their share price.
We believe these names are close to finding support and should be the focus of establishing entry conditions. Watch the short-term momentum indicators for a reversal higher.
Click below to watch the short two minute video
Our ALGO engine triggered a buy signal for LLC last Friday at $18.70.
We mentioned in our commentary that investor support should emerge near the $18.00 support level; the low for today has been $18.02
From a technical perspective, internal momentum indicators have reached an extremely oversold level and a price reversion higher looks likely from here.
We see the first level on upside resistance near the October 2nd high of $19.60.
Our ALGO engine triggered a buy signal for LLC into Friday’s ASX close at $18.70.
This “higher low” pattern is referenced to the intraday low of $17.25 posted on April 27th.
Since reaching an all-time high of $21.70 on August 7th, the share price has dropped over 14% and traded to a 5-month low on Friday.
We believe the company is well positioned in the infrastructure construction space and its international expansion will diversify the risk of a slowdown in the domestic residential market.
At current levels, we calculate LLC is trading at about 13X FY 19 earnings and expect the stock will find investor interest above the $18.00 support area.
Lend Lease has filled the price gap to $18.50 and appears to have found price resistance.
Our initial downside target is the April 9th low of $17.05.