At time of writing, shares of Lendlease Group [ASX:LLC] are in a trading halt.
The company has gone for a mammoth $1.15 billion capital raise to shore up its finances in the wake of the COVID-19 mess.
Today, I’m going to run you through why the LLC share price could be a bargain, if you start to think about things in a particular way.
You see, I’m not usually interested in giant ASX-listed companies like Lendlease.
They tend to move with the market.
I prefer working on small-caps and mid-caps more, partly because they are more exciting and partly because I think they sink or swim on their own merits.
But Lendlease is in a unique position, based on these three factors:
- If it’s a mid-cycle slowdown, property should bounce back through to 2026
- If property does bounce back, it will be on the back of huge infrastructure spending
- If current fiscal and monetary stimulus is anything to go by, Lendlease could be the beneficiary of this infrastructure boom
Let’s take a look at what the Lendlease share price is doing at the moment, to give us some context:
A strong run up towards the end of the year, followed by a hammering.
It looks to be stemming the bleeding, with its 20-day moving average starting to pick up the sideways action.
Call it a ‘dead cat bounce’ or bargain hunting, but for now it’s holding up.
This is where the capital raise comes in and these are the terms:
- $950 million institutional placement at 8.8% discount to five-day Volume Weighted Average Price (VWAP) ending 27 April
- $200 million to eligible security holders at 2% discount to five-day VWAP prior to closing of Security Purchase Plan (SPP)
- Placement makes up 17.2% of existing securities on issue
- Will bring total cash and undrawn facilities to $3.95 billion
What to make of Lendlease’s capital raise…
Lendlease isn’t alone in going for a capital raise, just the other day National Australia Bank Ltd [ASX:NAB], went for one.
The other big banks, with maybe the exception of Commonwealth Bank of Australia [ASX:CBA], could follow their lead.
Turns out, when the economy goes pear shaped everyone scrambles for cash, not just regular citizens.
I’ve got a feeling Lendlease may do better than the Big Four banks though.
This is because they build things, rather than finance them.
They don’t have to worry too much about the capital input — that’s for the government and big banks to worry about.
So, putting Lendlease’s capital raise in perspective, having $3.95 billion to use on new projects is a fair whack relative to its market cap of just over$6 billion.
But where will the Lendlease share price go now?
Lendlease outlook hinges on the cycle and governments splashing the cash
In the short-term, the Lendlease share price may continue to go sideways for a bit given the discount.
But let’s think long-term.
The company’s current projects span residential, commercial and public transport projects.
As a result, you get the full spectrum of exposure to property price movements in multiple countries.
W.D. Gann and others interested in the property cycle say it lasts on average 18.6 years.
Based on the last crash (GFC), I’d say we are in a mid-cycle moment — and there’s another six more years to go before it all resets properly.
The cycle is based on not just the US housing market, but also the predictable responses of governments to downturns.
Loosening of credit, asset purchases, writing cheques to citizens and above all else, lots and lots of infrastructure spending.
We’ve seen it all before.
As such, after this capital raising, Lendlease stands to benefit from these types of policies.
There’s no guarantee that Lendlease will fully capitalise on its new stack of cash.
However, it’s always worth consulting the history books on property before looking at these types of companies.
If you want to learn more about the companies our editor Callum Newman thinks can beat the coronavirus meltdown, you can find his top picks here. These three ‘pandemic survivors’ are well placed amidst the chaos.
For Profit Watch