Lend Lease moves to shore up confidence
However the move did not have the desired effect on the stockmarket, with the shares marked down another 19¢ to $8.45, well below the $11.25 they were fetching as recently as May 14. About $1.6 billion has been wiped off the company's market capitalisation.
One broker said while Lend Lease was well managed, it was in a sector that was highly leveraged and reactive to small shifts in the economic cycle.
"Construction is capital intensive, with long-term projects, but a small happening can shut a site down for weeks," the broker said. "This is not helped by the weaker mining sector. While Lend Lease has a small exposure to that sector, it seems to be enough to raise concern among investors."
In a market update on Monday, Lend Lease chief executive Steve McCann said the "underlying construction markets in Australia, Europe, the Middle East and Africa have softened in the second half of the 2013 year, contributing to reduced earnings from the construction businesses in those regions".
The construction sector is the single biggest division for Lend Lease, contributing about 42 per cent of group earnings.
In a move to clarify the position, Mr McCann said on Tuesday that Lend Lease "confirms it is on track to deliver a solid result in line with market expectations for 2013 financial year". This could be in line with the "published Bloomberg median of $547 million" . For the year ending June 30, 2012, the net profit was $501 million.
Most brokers have maintained a buy recommendation on Lend Lease but that is based on forecast improvement in the 2014 financial year.
The warning on construction came as Mr McCann unveiled a restructure that would consolidate the Abigroup, Baulderstone, project management and construction and infrastructure services businesses. These were acquired through the Valemus takeover in 2011 from the German constructor Bilfinger Berger for $960 million.
Analysts at CIMB said Lend Lease's update reflected a composition change to its profit expectations.
"Prima facie, this is a deterioration in the operation of the business this year, but in our view it also highlights the likely drivers for the business and share price performance through 2015-2016 financial years, in particular," they said.
"We have made no change to our recommendation, although we see likely outperformance in the latter part of the 12-month period rather than the earlier part."
Frequently Asked Questions about this Article…
Lend Lease issued formal profit guidance of between $540 million and $550 million for the full year. The company said this is in line with market expectations and roughly matches the published Bloomberg median of $547 million. For context, Lend Lease reported a net profit of $501 million for the year ending June 30, 2012.
Despite the guidance, Lend Lease shares fell further — down 19 cents to $8.45 — which is well below the $11.25 level seen on May 14. The share price decline wiped about $1.6 billion off the company's market capitalisation.
Investors remain concerned because Lend Lease's core construction markets have softened, and construction is its largest division (contributing about 42% of group earnings). Brokers also note the construction sector is capital intensive, highly leveraged and reactive to small shifts in the economic cycle. A small disruption can halt projects and reduce earnings, and even Lend Lease’s limited exposure to the weaker mining sector has raised investor concern.
CEO Steve McCann said that underlying construction markets in Australia, Europe, the Middle East and Africa softened in the second half of the 2013 year, which reduced earnings from construction businesses in those regions. He also said Lend Lease is on track to deliver a solid result in line with market expectations for the 2013 financial year.
The construction division is very important — it contributes about 42% of Lend Lease’s group earnings. That large weighting means weakness in construction has a material impact on overall results.
Lend Lease unveiled a restructure to consolidate Abigroup, Baulderstone, project management, construction and infrastructure services businesses. These operations were acquired through the Valemus takeover in 2011 (bought from German constructor Bilfinger Berger for $960 million). The consolidation aims to clarify operations and may affect future cost structures and earnings composition.
Most brokers have maintained a 'buy' recommendation based on expectations of improvement in the 2014 financial year. One broker described Lend Lease as well managed but cautioned that the sector’s leverage makes it sensitive to economic shifts. Analysts at CIMB said the update reflects a change in the composition of profit expectations and highlighted likely drivers for business and share-price performance through the 2015–2016 financial years; CIMB kept its recommendation but expects outperformance later in the 12‑month period.
Key takeaways from the update: Lend Lease issued guidance of $540–$550 million, roughly matching the Bloomberg median; construction market weakness is reducing near-term earnings (construction is ~42% of earnings); the company is restructuring acquired businesses to simplify operations; brokers generally remain constructive on a 2014 improvement, but the share price reaction shows market concern about cyclicality and leverage in the construction sector. Investors should weigh these factual points when assessing Lend Lease exposure.
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