So much potential

1H23 RESULT

Need To Know

• Operating earnings and dividend in-line with market.
• $200m UK provision feels very ‘on-brand’ for LLC.
• No change to FY24E guidance.  Large 2H skew to earnings remains in FY23E. LLC flags risk to the pace of earnings recovery. 

Another Result that gives clues to the LLC earnings potential, but it remains just out of reach. Balance sheet gearing is elevated, and there are no clear signs of sustained earnings recovery. Result unlikely to be strong enough for the share price to hold onto recent gains. 

Statutory loss of -$141m driven by $239m of below-the-line charges including $200m provision for remediation work for UK Residential housing almost feels right ‘on brand’ for LLC (long history of write-downs and one-off impacts).

At an operating level, $103m NPAT and 4.9cps distribution are in-line with the market implying a 32% payout ratio (bottom end of 30-50% guidance). 

LLC guidance calls out risks to the pace of the earnings recovery (‘including inflation and interest rates’), the 65% skew to 2H23 looks ambitious in our view. We see some of risk-negative earnings revisions post this result for 2H23. 

LLC maintains guidance of achieving $8bn of development completions in FY24, and 8-10% ROE.

The potential for LLC remains strong, with the Development pipeline >$US121bn (vs $US117bn 30 Jun). $6bn of development commencements commence in 2H23 which is important to reach the $8bn development completion for FY24. 

Cash flow remained weak in half with operating cash flow negative. This has lifted the balance sheet gearing towards the top-end of the guidance range of 10-20%. Gearing stands at 17% 31 Dec 2022 vs 7% 30 Jun 2022.  Gearing is expected to fall to ~15% by mid-2023 – primarily via capital partnering in the short term. 

Investment View

We rate LLC a Hold. Clear evidence of earnings improvement is not likely until 2023/24 (increasing this risk is likely to slip in 2024/25). We resist the urge to have a more constructive view on LLC despite emerging valuation appeal. The macro backdrop of rising interest rates/cost inflation creates a layer of uncertainty around LLC's FY24e targets in our view.

LLC trades at PER 10x FY24E and 0.8x book value. Within the S&P/ASX 100 Industrials, only Qantas (QAN) trades on a lower PER multiple. The market is only pricing in limited earnings recovery LLC is guiding for FY24E. LLC will hold an Investor Day in Jun/Jul 2023, the second in ~6 months.