Lend Lease (ASX:LLC) $14.09 as at 9/11/2018
This morning Lend Lease (ASX:LLC) came out with a downgrade saying that they anticipate taking a ~$350m after tax impairment charge against its Engineering division in 1HFY 19. This has been a problematic part of the LLC operation for some time with such slim margins offering very little cushion if one of two projects have issues.
From the conference call with management;
- Cost inflation in projects
- Wet weather and lower productivity issues
- NorthConnex plus some smaller projects problematic
- Spin off of Engineering business a possibility
Importantly, this highlights the cost pressure coming through infrastructure projects and other companies to be potentially impacted would be (ASX:DOW), (ASX:BLD) and (ASX: CIM).
LLC has spent a number of years de-risking the business however the one area that has always been problematic has today caused the share price to tumble around 18% at time of writing. It seems like when times are good, margins are under pressure and when its bad the margins are under pressure.
The market will now focus on whether or not LLC will spin out the engineering division, and the CEO alluded to that on the call. Citi put out a note back in October outlining why that could be a good strategy sighting;
- LLC is worth more today without engineering based on applying a higher multiple to the stocks ex-engineering
- Engineering is a management distraction
- Engineering lacks scale and building scale will increase risk (which then had a negative influence on the multiple the market will pay for the group)
- Limited synergies with development and funds management
- An in-specie distribution avoids selling the business at the wrong time
Lend Lease (ASX:LLC) Chart
Market Matters Take/Outlook