Asset sales to underpin guidance

RESULTS

Need To Know

• Overall, an in-line result. EPS and DPS ahead, but soft on segment margin performance (ex-development). Gearing lower than expected.
• FY24 ROE guidance (lower end of 8-10%) maintained but is now helped up by cost out program and (future) asset sales.
• No update on the potential divestment of LLC’s Communities business. We expect consensus FY24 estimates to be left largely unchanged at group level. 

LLC FY23 Result: 

EPS 37.3cps vs ~36cps consensus (~3.6% beat)

DPS 16cps vs 12.5cps consensus (~28% beat). 

Gearing better than expected (14.8% vs mkt at ~17%) - 10-20% target range. 

Group held its >$8bn FY24 completions target and target ROE at the “lower end of 8-10%”. 

Segment Analysis:

• Investments ROIC weak: 6.1% vs 6-7.5% target.
• Developments ROIC beat: 3.3% vs 2.5-3.25% target.  
• Construction EBITDA margin miss: 1.2% vs 1.5-2.5% target.

Highlights

Core operating performance broadly in-line with market expectations. Company reported a statutory loss due to a ~A$295m retrospective provision from the UK government on residential buildings as well as asset revaluations. 

Asset sales and operational headwinds key contributors to weaker segment margins. Outlook suggests improvement to come for segment margins. The Group is moving away from segment guidance shifting to the overall group ROE guidance, given its now "more achievable".

The cost out program (~10% headcount reduction) is expected to deliver ~$60m in pre-tax benefits in FY24. 

Investment Implications

At face value an in-line result however when unpacked it appears the FY24 outlook is being propped up by the cost out program and the sale of assets. 

Surprisingly, a transaction in Communities is now being factored into guidance for FY24. This was not previously expected by the market. We expect a complete sale of communities at a small premium book value would raise early to mid ~A$1bn. 

The balance sheet appears to be less of an issue than what the market was fearing. We would need something further to go wrong to make gearing an issue at this point. 

We note: 

1. The group expects no refinancing to occur in FY24.
2. Expect additional cash inflow through partnership and asset sales (Complete sale of communities at a small premium book value would raise early to mid ~A$1bn). 
3. Expected to book earnings off A$8bn completions.

LLC appears cheap on a multiple basis, trading at a ~18% discount to book value and a PER of 10.8x (a 1SD discount to the long term average). Despite this, we believe the market will need further clarity around the ability for LLC to meet its FY24 ROE guidance before it shows interest.  

 We re-affirm our HOLD rating.