Australian property giant Lendlease Group [ASX:LLC] is today’s standout performer on the ASX 200 as investors cheer the company’s plans to retreat from its global ambitions.
Lendlease shares are having their best day of trading this year, up over 10%, trading at $6.48 per share.
The surge comes as Lendlease announced it will exit all international property development and sell its overseas construction divisions in the United States, United Kingdom and other regions over the next three years.
This marks the biggest shakeup for the company since it sold MLC to National Australia Bank over two decades ago, finally abandoning Lendlease’s long-held quest to be a globally significant property builder.
However, even today’s sharp jump hasn’t been enough to reverse its share price losses over the past 12 months. Its shares are down by 17%, that’s around -35% below the sector average.
So, does the change justify your hard-earned dollars for investment, or is the property sector still structurally weak?
Source: TradingView
Lendlease Sells Unfinished Projects and Businesses
The company announced today it will offload over $4 billion worth of international assets and construction projects, leaving it focused solely on its historically more profitable Australian operations.
For years, Lendlease’s global expansion and capital allocation decisions have drawn criticism from major investors like Tanarra Capital and Allan Gray.
In April, Tanarra chief John Wylie penned a scathing seven-page letter labelling the board ‘unfocused and overextended’ and calling for its renewal.
The company seemed happy to ignore this and other shareholders until it experienced a -20% drop in February.
At the time, Lendlease’s core operating profit fell to $61 million, roughly one-third of what analysts had expected.
The developer also slashed its earnings outlook — blaming weaker development revenue.
This was the wake-up call the company needed, and today’s move shows it’s finally giving in to demands for a slimmed-down, Aussie-centric business.
In its strategy update today, the company said it would ‘recycle $4.5 billion’ of capital by selling off its unfinished global development projects.
The company will then move its sales proceeds into a newly established Capital Release Unit (CRU), which will oversee the strategy shift.
Around $2.8 billion of the $4.5 billion capital is expected to be returned by the end of FY25, with the majority of that used to pay down debt.
Lendlease says that a lower-risk business is ‘central to our new strategy, ‘ which will mean strengthening its balance sheet.
It is targeting a reduction in its debt gearing target range to 5–15% by FY26.
That’s down from the prior 10–20% and will prepare the company for a $500 million share buyback, which was also flagged in the update.
Lendlease Chairman Michael Ullmer said:
‘We recognise 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.’
So after years of investor pressure, why is Lendlease changing tack now? And what does it mean for the company’s future? Let’s take a closer look.
A Painful But Necessary Reset
Lendlease’s international forays have been plagued by issues in recent years as the property cycle turned.
Rising interest rates and softening prices have left the company with unprofitable developments in Malaysia, the US, Italy, and the UK.
For example, Lendlease’s UK business was hit by weaker profits and a costly dispute over fire safety defects at a hospital project in Leeds that will cost it nearly £8 million.
While in the US, much of Lendlease’s work is tied to struggling commercial office projects amid the rise of hybrid work models after the pandemic.
These international headwinds have weighed heavily on the company’s performance, with shares down 17% year-to-date even after today’s spike.
The decision to exit these overseas markets will be painful in the short-term, with Lendlease expected to book over $1 billion in writedowns.
Even more writedowns could follow this as assets are divested and sold at rock-bottom prices in today’s weak property market.
It seems leadership are betting that the best path forward is to focus on Lendlease’s traditionally stronger Australian home market.
The offshore retreat leaves Lendlease’s construction and development activities centred on major local projects like Sydney’s Barangaroo, Melbourne’s Docklands and the Brisbane Showgrounds.
However, the international exits alone may not immediately solve all of the company’s troubles, with subdued profit outlooks persisting.
Just look at their recent performance in Australian developments:
Source: Lendlease — Development Return on Invested Capital (ROIC)
For investors looking for investments in the beaten-up property market, there may be more compelling investments that don’t hold such high execution risk.
REA Group [ASX:REA], for example, could be considered by some as a safer option. It has seen revenues climb by 20% so far in FY24 and free cash flow increase by 33%.
However, as Warren Buffet famously said: ‘You pay a high price for a cheery consensus.’
REA sits at the top of its trading range at a whopping $186 per share — that’s an expensive bet for investors to make.
Those looking for opportunities right now might be better suited to look towards Australia’s traditional strengths.
The sector I’m talking about here is mining, which could be on the cusp of its next super-cycle.
This Trend in Mining Could be the Next Growth Story
In the last mining boom, a little-known 2-cent share went to $10 in just five years.
That’s an incredible 50,000% return from Fortescue Metals [ASX:FMG].
Source: TradingView — FMG’s Breakthrough moment
But finding winners in such a high-risk sector is never easy, and Fortescue’s iconic rise is unlikely to be repeated.
Our geologist and resources expert, James Cooper, set out to find the next big disruptors in Australia’s mining sector.
And he’s found five candidates that he thinks could emerge as major victors in 2024 and beyond.
A new mega-theme is developing in mining, and we think five companies will be at the forefront.
The signs are all there, and you only have to follow the big miners’ actions to see that the smart money is heading this way.
If you want to learn more about what’s in store for Australian mining and some of our best stocks to play this next trend.
Then click here to learn more about the next potential breakout stocks.
Regards,
Charlie Ormond
For Fat Tail Daily
