Lendlease's strategic shift amidst financial challenges

27/05/2024 10:25:00

Lendlease (ASX:LLC) is taking a financial hit to extricate itself from low yields and loss-making overseas investments in construction, building, and other developments. The company will make impairments of up to $1.48 billion, writing down these offshore investments, signaling an end to its global ambitions.

To allay concerns among investors, it plans to prioritize an initial half-billion-dollar buyback. This move is expected to have a positive impact on the securities, which ended Friday at $5.89, down more than 21% year-to-date and over 58% in the past five years, marking a significant investment disappointment for many.

The bottom line is the freeing up of a suggested $4.5 billion for securityholders, particularly those activists who insisted on the company changing course, and local growth, with much of it expected to be returned. This marks the most significant change for Lendlease since it sold its wealth management business, MLC, to National Australia Bank in 2000 for $4.56 billion. NAB subsequently sold MLC to IOOF in 2021 following damaging disclosures about some of its policies and practices during the Hayne banking and financial services royal commission.

Now Lendlease will have to regroup and find ways to generate profits on a smaller scale after revealing the plan during a much-awaited investor briefing today. The company plans to exit or sell more than $4 billion worth of international works, primarily in the United States and United Kingdom, over the next three years.

"In combination, these steps leverage the Company’s competitive strengths and simplify the business to enhance Lendlease’s integrated real estate business in Australia with international investment management capabilities,” the company stated in Monday’s ASX statement. "Significant progress is expected within the next 12 to 18 months, with a range of important initiatives already well-progressed.”

Measures outlined on Monday included:

• A structurally lower cost base with a further $125 million of annualized pre-tax savings, to be achieved within 12 months, with additional opportunities to follow.
• Releasing approximately $3.42 per security of net tangible assets from a newly established Capital Release Unit (CRU), with the majority anticipated by the end of FY25.
• A stronger balance sheet with significantly reduced gearing to within a revised target range of 5%-15% anticipated by the end of FY26 (down from 10-20%).
• A phased return of capital to securityholders with an intention to undertake an initial $500 million on-market buyback.
• A lower-risk business positioned for profitable future growth with attractive Return on Equity where Lendlease has a proven track record and competitive advantage
• Improved earnings on a like-for-like basis.

Lendlease made it clear that debt reduction and capital returns for securityholders "will be prioritized through the implementation of a disciplined Capital Allocation Framework that reflects the changed business priorities and provides a transparent hierarchy for capital deployment.”

Lendlease Chairman Michael Ullmer said in the statement, “We recognize that our security price performance and securityholder returns have been poor as we have faced structural challenges and a prolonged market downturn. We need to take significant action at an accelerated pace to deliver value for our securityholders, capital partners, and customers."