Lendlease will need to deliver a stunning second-half as Morgan Stanley warns of a “soft” result ahead, beset by major projects struggling to lock in buyers for prestige developments. However, it could be a different story in three years’ time.
The broker is counting on first-half net profit of only $181.3 million, implying a 39-61 split with its full-year profit estimate of $461.7 million in mind. Morgan Stanley is below the street on both accounts: market consensus is for 2020-21 net profit of $525 million, split 43-57, or $228 million-$309 million between the first and second halves.
“There is a chance that the market may be disappointed, if it is not fully aware of the potential for a heavy 2H earnings skew,” writes analyst Simon Chan, who argues the business is not that complicated, but timing is a factor largely out of its control.
“Based on what we could gather in terms of major projects progress in the Jul-Dec 2020 period, we believe there has been limited progress across its major projects, meaning material profit recognition looks to be a 2H21 story at the earliest.”
One Sydney Harbour the only material project in 1H21, according to the broker. MS
The partial sell-down of One Sydney Harbour (the $1.5 billion Barangaroo residential project) looks to have delivered $140 million of EBITDA, but “there has been very little progress in other key projects”.
Those include the Milan Innovation District, Van Ness in San Francisco and International Quarter in London. “Upside risk could come if Lendlease secures tenants and partners for multiple projects by June 2020, but likewise, there is downside risk to our forecasts if progress remains as slow as 1H21,” Mr Chan warns.
Lendlease reports on February 22; Morgan Stanley has a $13.98 target price and equal-weight rating on the stock.
“Whilst current crystallisation of the pipeline is impacted by COVID, sooner or later, the 21 major projects in the pipeline will be put into production, meaning the current slow-down will result in a glut of profit events in two to three years’ time.”
