Do more asset sales help?
COMPANY UPDATE
Need To Know
- Press reports suggest a further $600m in asset sales in two flagship Sydney residential projects.
- Sale proceeds likely to be applied to debt reduction, gearing currently at 17% vs 20% limit.
- We remain cautious around LLC’s ability to hit guidance for earnings improvement in 2024
Recent press reports indicate that LLC is close to securitising ~$600m of sales from two properties in Sydney’s Barangaroo (NSW) residential development to investors.
The transaction is similar to what LLC has done before, where it pre-sells the receipt of cash-flows from pending residential sales. For LLC the agreement brings forward the receipt of proceeds for residence owners from 2025/26 to now.
LLC’s balance sheet gearing rose from 7% to 17% in the last half. This is towards the upper limit of LLC’s 10-20% gearing comfort range.
We have seen recent valuation markdowns from commercial property REITs, including Challenger Group (CGF), Charter Hall (CHC), and Dexus (DXS) that have all marked down valuations by mid-single digit percentages in the six months to 30 June 2023.
Prima-farce, valuation adjustments of similar magnitude applied to LLC’s book would threaten to breach LLC’s gearing target. Whilst LLC has previously pushed back on equity raising, the risks are heightened.
Any slippage in LLC’s pipeline for development completions and earnings generation would only acerbate the balance sheet issue in the short term. LLC shares are 8% short sold, an all-time high.
Figure 1: LLC EBITDA. Market is assuming a strong recovery in earnings into 2024/25.
Figure 2: LLC continues to trade at a large discount to book value.
Figure 3: LLC EPS vs share price. The market is discounting the earnings recovery, given risks to FY24E numbers.
Investment View
LLC appears cheap on a multiple basis, trading on a PER of 9x (1.5 SD discount to its long-term average) and a P/NTA of 0.65x. Sentiment towards LLC is about as bad as it gets.
In our view, the market will want greater insight into the completions pipeline as well as capital levels as a pre-condition to any re-rate of the share price.
Our base case does not assume equity capital raising is needed to protect the balance sheet. Further assets sales are likely to be drawn upon. LLC has flagged it needs $2.5bn of capital to complete projects into FY26E. We estimate two-thirds can be funded via retained earnings, with the remainder via asset sales including Communities and Retirement sell-downs. The higher interest rates go, the more risk there is around proceeds. We retain our Hold Rating.
Stock Overview
Share Price
Company Overview
LLC is an Australian firm that develops mixed-use areas, suburban communities, and retirement villages, manages construction projects, and invests in residential, office, retail, industrial.
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