The Lendlease result was, thus far, possibly the worst we’ve seen of any company, let alone one we own in our direct equity sleeves.

It was a big miss at all levels, and is very difficult to reconcile with the upbeat reaffirmation of guidance from the late December update. That hyperlinked note points to the 8-10% ROE guidance, that is now downgraded to ~7%.

There is some throat clearing in the result, where mgmt indicate “it could be higher than 7%, if they hit certain outcomes”.

The below is a good summary, the current half was poor, and the second half is expected to be better, along pretty much every major business segment (development to be “much improved”, or “higher 2nd for construction”).

The capital recycling initiatives (e.g. the c$1.3bn communities business, mentioned in that December update hyperlinked above) should put the balance sheet back into that 10-20% gearing range, and I think we can be reasonably comfortable there.

The key for LLC is that the “material improvements”, be it ROIC/ROE/margin are always a day away. The valuation is cheap, today’s market movement wipes out much of the recovery seen in the past two months (which occurred because of those positive trading updates) and puts the stock back into “bombed-out zero expectations” (not just low expectations) territory.

LLC mgmt did make the point that they are dependant on capital market activity, in development and in real estate, and we know that transactional volumes have been very weak in commercial real estate for some time, firstly due to rates and secondly due to issues specific to Office, where LLC has a material exposure.

We had thought, given mgmt told us (as in, told everyone), that moderate ROE’s of 8-10% (now 7%) were possible, even in this difficult market environment, and such a return would still be very accretive to LLC’s earnings profile, and therefore was a worthwhile investment even despite the challenged top-down lens.

We are being asked to give it another half of patience.

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