MARKETS SPECTATOR: Lend Lease levels out

Morgan Stanley says a deteriorating construction business in some regions will be offset by development project revenue for Lend Lease.

Morgan Stanley analyst John Meredith says deteriorating conditions for Lend Lease’s Australia, Europe, Middle East and Africa construction business is offset by better sales from development projects. Meredith estimates Lend Lease’s 2013 net profit will be $551 million, a 13 per cent increase from $489 million in 2012.

Lend Lease shares have dropped 7.8 per cent since Monday after it said conditions for the company’s Australian, Europe, Middle East and African construction unit “softened” in the first six months of 2013. This will result in “reduced earnings” for such businesses in those regions, the company said.

“We estimate a 10-15 per cent underlying downgrade in Australian construction, which, so far is a combination of project specific provisions and weaker top-line growth,” writes Meredith in a research note. “We expect further pressure will materialise in the 2014 financial year and wonder whether the assumed $25 million restructuring this year, and a further small amount next year, will be sufficient.”

Lend Lease shares closed yesterday up 17 cents, or 2 per cent, to $8.62.

The stock is trading at about 7.9 times 2014 forecast earnings, according to Meredith. He has an “overweight” recommendation on the stock. Meredith says Lend Lease’s 30 per cent stake in Bluewater shopping mall in the UK could fetch the company $771 million.