- Lend Lease asset sales continue - Barangaroo and other projects on track - Valemus proving a better acquisition than first assumed - Brokers lift target prices

By Greg Peel

Property developer Lend Lease Group ((LLC)) held an Investor Day last week to update the market on how things were progressing. Realistically there wasn't any particularly new news, but the more the old news is repeated, suggests RBS, the more investor confidence will grow. So far the market has rather overlooked the value of the old news.

No doubt the weak local residential market, the weak global commercial construction market, and the strong Aussie dollar have been concerning investors. Then there's the controversial Barangaroo project in Sydney which has met with much resistance and has been subject to review. But analysts from five of the seven brokers in the FNArena database covering the stock have reported on the Investor Day and have come away very impressed.

One bit of new news was that LLC has agreed to sell its 50% interest in the King of Prussia mall in the US. The deal should generate about a $100m profit which will be recognised in FY12. The company intends to look at further sales of its mature assets and brokers have identified its 25% interest in the Somerset mall in Singapore and 30% interest in the Bluewater mall in the UK as candidates for further profit-making divestment.

The big news, however, is the Valemus acquisition, which has surprised even management after 70 days of ownership. Strong growth in the rail, port, LNG, power and mining sectors are driving earnings and some $100-200m of synergies now expected are better than initially assumed. LLC expects 15% accretion in FY12. Industry growth assumptions for engineering and construction in the next two years already appear likely to be surpassed. BA-Merrill Lynch suggests the infrastructure construction market, which represents almost half of Valemus' revenues, is likely to grow at about 8% or twice the rate of GDP.

RBS suggests very thorough due diligence was undertaken by the company, from a position of strength, and that will be reflected in earnings performance in the coming years.

On the Barangaroo front, the new state government is on board and there have been no changes to feasibility despite planning reviews. LLC is already in discussions with eight tenants to take up two-thirds of the available office space and development profits are expected to flow from the second half of FY12. An independent review is underway nevertheless but management does not expect the plan to be delayed or materially altered.

Looking further ahead, LLC's main UK projects are stacking up and Merrills notes residential demand supports the Elephant & Castle development (profits from FY13) and office rents support the Stratford development (profits from FY14).

As for the weak local resi and global commercial markets, analysts are generally confident of a turnaround down the track which will lift otherwise subdued operating profits up to meet asset recycling profits.

There was some further news last week after the Investor Day, and that was regarding the Jurong project in Singapore. LLC paid a then record price a year ago for the Stage I development but now South East Asia's largest developer CapitaLand has come in and bid for Stage II at a price which represents a 56% increase on Stage I despite not being much different in plan, UBS notes.

Perhaps Macquarie sums it up best:

“With its balance sheet capacity, strong relationships with institutional investors providing access to third party capital and the ability to source capital internally through the sale of stabilised assets, LLC is well placed to fund the portfolio of major projects that will drive earnings growth over the coming years”.

Following Investor Day Merrills upgraded its recommendation on LLC to Buy from Hold such that five of seven brokers now have Buy ratings. JP Morgan remains on Neutral as does Deutsche Bank, albeit Deutsche did not report last week. Target prices increases took the consensus target to $10.21 from $10.11, suggesting 16% upside from the current trading price.

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