Can new CEO fix Lendlease? Shares rally on hire, but gearing target blows out
Lendlease's shares in freefall all year, however guidance for IDC business maintained at 28-34 cps is received positively from the market.
Source: iStock
Mentioned
KEY POINTS
- FY26 earnings per security guidance for IDC business is maintained at 28-34 cps
- Revised underlying gearing from 15% to mid-30% range due to timing of transactions and challenging market conditions
- Cash flows for FY27 are expected to benefit from materially lower CRU capital outflows
Lendlease (ASX: LLC) shares rallied as much as 6% this morning, after the challenged developer named Nick O'Neil as its new Group CEO and Managing Director, poaching him from AustralianSuper, where he led the Australian Real Assets division.
On the new appointment, Lendlease Chairman John Gilliam said: “With our strategy reset, portfolio simplification and foundations firmly in place, Nick is ideally positioned to lead the next phase of revitalising and strengthening Lendlease.”
The appointment came with an FY26 trading update, which reaffirmed full-year EPS for its IDC business at 28-34 cps, in line with most analyst expectations.
FY26 update: Gearing target blows out
The company had been targeting underlying gearing of 15% by the end of June, with a pipeline of $3 billion in capital recycling expected. However, due to the timing of transactions and more challenging market conditions, it has revised gearing to the mid-30% range. This incorporates ~$1 billion of second half development and land payments – principally net production spend and deferred land payments on the completed One Sydney Harbour and Victoria Cross project.
The stock briefly dipped 3.4% in early trade, likely in response to missing the prior 15% gearing target by a wide margin. Earlier this month, Morgan Stanley noted that gearing levels of circa 34% were “sub-optimal considering Lendlease has completed $2.3 billion of asset sales since its May-24 strategy update, when gearing was 22.9%, yet gearing has increased substantially since.”
The stock’s early dip reversed quickly and hit a high of 6.8% as Lendlease stated that transactions are largely complete with “cash flows for FY27 are expected to benefit from materially lower CRU capital outflows, targeted residential settlements and the application of capital recycling proceeds primarily to debt reduction”.
Morgan Stanley sees a path up
Lendlease has had a challenging year, with its share price falling close to 50% year-to-date on the back of several financial losses and ongoing asset devaluations. Earlier this month, the company was forced to offload major international development rights at steep discounts, including the Milano Santa Giulia project in Italy, triggering a $175 million operating loss.
LLC one-year share price chart (TradingView)
With all this said, Morgan Stanley suggested it could be more bullish if the company managed a successful recap or divestment of Victoria Cross Office which could return $400-$860 million in cash and it mentioned Lendlease’s retirement portfolio sale could reduce gearing by 3-5%. The analysts have an Equal-weight rating on the stock with a $3.25 target price.
However, the turnaround carries execution risk on asset sales. The recent Milano Santa Giulia North divestment, carried at $265 million, fetched cash proceeds of just $90 million. That gap raises questions about valuation risk across the remaining $1 billion of commercial real estate, and whether similar markdowns lie ahead.
