On Monday, we saw LLC announce the sale of 12 communities projects for $1.063bn to Stockland (SGP) with a potential for another $239m, subject to an option held by SGP. The price reflects a ~20% premium to book value, and the sale should add $130-160m of NPAT to LLC’s FY24 result, which reads well on the surface, although this has been in the pipeline for a while now. Since the deal was announced, LLC has slipped -2.8% while SGP has fallen -2.4%, which is not great compared to the market or the Real Estate Sector, which have rallied strongly. It’s unusual that the market doesn’t perceive there to be at least one winner from this or any such deal.
This sale reduces LLCs gearing by ~5% while they maintained their previously stated guidance for ROE at the lower end of the 8-10% range; our worry is the quality as contributions from “non-recurring” are set to be around a third of their profit. With the communities sold, LLCs’ focus turns to selling their China and Australian retirement businesses as they look to consolidate the company further. Most investors appear to agree on the quick sales of the “low-hanging fruit,” but this comes with obvious issues; hence, not surprisingly, some prefer a more proactive exit of non-core assets. The current environment of falling bond yields should help LLC with its asset sales, but this can change as it did in September/October.
The company’s clear goal is to clean up and refocus the business after an awful time post-COVID; the question we ask ourselves is, what will LLC be worth through 2024/5 after the proverbial broom has been through the business? The risk remains that it may take time to turn the business around, and after the stock’s ~25% bounce, we are reconsidering our investment thesis into 2024.
- We like the value LLC delivers ~$7.30 but are starting to question the stock’s quality as we consider portfolio tweaks into 2024.
MM is long and cautiously bullish LLC into 2024
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