We might finally be seeing bottoming in the Lendlease Group (ASX: LLC) share price as the latest results and updates from other S&P/ASX 200 (Index:^AXJO) (ASX:XJO) point to a brighter 2019 for the embattled diversified property and construction group.
That's the view of UBS who is convinced that Lendlease will be able to redeem itself this year and the broker has upgraded the stock to "buy" from "neutral" with a price target of $15.70 a share as its analysts brush aside worries that the group will post further large impairments.
The Lendlease share price surged 4.4% to a three-month high of $13.48 and is the fifth best performing stock on the ASX 200 Index this morning.
No more skeletons in the closet
The group posted a shock impairment charge in November last year sent the stock plummeting 36% to a low of $11.11 on January 2, 2019, and the stock has struggled to claw back much of the losses despite its seemingly low valuations as bargain hunters fear a further bad news from a small number of troublesome infrastructure projects.
However, UBS thinks the risks of that are low following Transurban Group's (ASX: TCL) results this week which indicated that Lendlease's problematic construction projects aren't falling further behind schedule.
What's more, Mirvac Group's (ASX: MGR) half year earnings update pointed to a strong office property market, particularly in Sydney.
Lendlease is exposed to this property segment too and UBS also likes its exposure to a high-quality global funds management business.
Those worried about falling residential property prices, particularly housing lots, do not need to fret about Lendlease as the group isn't reliant on its residential business for growth after FY19.
This is because it is looking to grow overseas (like in London) and has institutional capital partners for all asset classes, a key point of differentiation from other cycles, added UBS.
There's also uncertainty from the potential restructuring of the Lendlease business as the group is under pressure to sell its engineering business (the part of the group where the impairment charges are occurring).
Investors will probably get a better sense of what management intends to do with the division when it hands in its results on February 25.
Potential for more upgrades
UBS thinks it's increasingly likely that Lendlease will divest the business, which could force the group to take a further impairment charge as that business will probably have to be sold below book value.
"We see the market as pricing in $1.5b (assuming 7x Devt EBIT multiple) of total impairments which is unlikely in our view. As we move through 2019 clarity should emerge regarding the state of troublesome projects and potential exit options," said UBS.
If confidence is restored and the engineering business is sold, UBS thinks the stock could surge to around $20!
