The massive shake-up of Lendlease Group’s (ASX: LLC) business has taken its toll on the FY22 bottom line, with the company expecting the pain to continue into the current year before hitting its straps in 2024.
The property giant posted a bottom-line loss of $99 million for the full year, but notes that its performance improved dramatically in the second half as core profit jumped from $28 million in the first six months of the year to $248 million in the second half.
Lendlease, under the leadership of Tony Lombardo who replaced long-time CEO Steve McCann last year, has mapped out a simplification strategy that will see the business exit non-core developments and focus on emerging opportunities such as build-to-rent projects while shoring up its funds management operations.
The FY22 loss has been driven by $333 million in writedowns on existing operations and a further $42 million on the sale of its services business.
While the group saw its investments division EBITDA surge 80 per cent to $497 million, this was offset by a 61 per cent slump in development EBITDA to $18 million and a 24 per cent slump in construction earnings to $131 million.
Despite the headline loss, Lombardo says Lendlease has made ‘significant progress in resetting our company for future growth’.
“We are now a leaner organisation and more agile in responding to our customers,” he says.
“This year, we formed approximately $11 billion of investment partnerships that will underpin strong growth in funds under management while work in progress is at a record $18.4 billion.”
The development division’s weak contribution to the FY22 results was due to fewer project completions during the year but the company says it has received masterplanning approval for projects totalling more than $8 billion and has made a start on more than $6 billion in work including the final residential tower of One Sydney Harbour.
In construction, EBITDA was lower due to supply chain disruptions and higher costs, although the company says it has implemented strategies to mitigate these impacts.
Lendlease has a backlog of $10.5 billion in revenue, with almost 70 per cent of that for projects located in Australia as its ‘disciplined approach’ to bidding for work in the Americas has led to a drop in its backlog there.
“We have maintained capability given our confidence that backlog and revenue will recover over time,” says the company.
The star performer for Lendlease has been the investments division where return on invested capital of 9.7 per cent was well ahead of the 6 to 9 per cent target. This was aided by a financial partner acquiring part of the asset management income stream of the US Military Housing portfolio.
Investment partnerships that Lendlease struck during the year included a joint venture to redevelop the Comcentre in Singapore and another JV to develop the remaining office precinct at International Quarter London.
Lendlease says it has entered FY23 with solid momentum from the second half continuing, although it warns that higher inflation and interest rates add to the ongoing challenges.
“While the development pipeline is expected to continue to provide the predominant source of future growth for the investments platform, new initiatives will be pursued selectively alongside our investment partners,” says the company.
The investments division is expected to deliver returns of between 6 to 7.5 per cent and the capital invested in development will return between 4 and 6 per cent in the current year.
The $3 billion joint venture with Mitsubishi Estate Asia to acquire the One Circular Quay development this year is part of Lendlease’s planned $8 billion of project starts which the group says will improve returns over time.
“However, scale benefits will not be achieved in FY23 and the revised approach to joint ventures means profit on new projects is anticipated to be deferred,” the company says.
“As a result, returns in FY23 will remain below our target.”
The EBITDA margin for Lendlease’s construction division will fall between 1.5 and 2.5 per cent in FY23, below the target range of 2 to 3 per cent. This will also keep a lid on the company’s performance over the remainder of this financial year.
“We remain on track to meet our more than $8 billion completion target in FY24, along with the return on invested capital target for the development segment of 10 to 13 per cent,” says Lombardo.
“The record level of work in progress, along with our assessment of project fundamentals, provides confidence in achieving both the completion and return targets.”
Lendlease says won’t hit the targeted group return on equity of 8 to 11 per cent until FY24.
The company is paying a final dividend 11c per share, for a full-year payout of 16c per share.
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