Lend Lease Group What s next when the tax man calls?

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1 AUSTRALIA LLC AU Price (at 11:35, 30 Aug 2012 GMT) Outperform A$8.40 Volatility index Low 12-month target A$ month TSR % Valuation - Sum of Parts A$ GICS sector Real Estate Market cap A$m 4, day avg turnover A$m 14.6 Number shares on issue m Investment fundamentals Year end 30 Jun 2012A 2013E 2014E 2015E Revenue m 11,566 14,308 17,939 20,191 EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x LLC AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, August 2012 (all figures in AUD unless noted) 31 August 2012 Macquarie Securities (Australia) Limited What s next when the tax man calls? Event LLC reported an FY12 operating profit after tax of A$507.2m (Macquarie forecast A$499.8m), up ~5% YoY. After adjusting for property revaluations of A$5.8m, statutory profit after tax was A$501.4m. The operating result is above the top end of the A$ m guidance range provided on July 2. Impact So where can FY13 earnings settle when the tax man calls? We have considered LLC s ability to grow earnings in FY13 given the tax rate reverts from ~3% in FY12 to ~17% in FY13 (~A$89.6m drag). As indicated in the chart herein, we believe this drag is more than compensated for by additional capital recycling (Barangaroo and Greenwich Peninsula), normalising for the US litigation, residential write-downs, and ~10% underlying earnings growth driven by the first contribution from Sunshine Coast University Hospital (~5%). This is a positive outcome. Australian construction EBITDA margin expansion a feature. The Australian construction EBITDA margin was 5.4% for FY12, an improvement from the 5.1% in 1H12 (+30bps). With FY12 being the first full-year contribution from Valemus (settled in March 2011), it appears that the integration is proceeding well. We note Australian backlog revenue declined A$658.6m to A$9,264.5m (down ~6.6%) pre the addition of Sunshine Coast (~A$1.6bn). We believe this is indicative of a prudent risk management approach to not take on unprofitable projects simply to build the backlog. Residential the weak contributor as expected. The group booked a A$27.7m impairment in 2H12 on five residential projects (two in NSW, two in QLD, and one in SA). Normalising for the impairment, 2H12 development EBITDA was A$46.5m, down from the A$53.7m 1H12 level, which we had deemed to be very weak at the time. Given this division also contains retirement earnings, we expect the residential contribution could have been single digit. We continue to have conservative development estimates in FY13. Offshore businesses grinding in a subdued backdrop. The Americas reported EBITDA of A$77.7m in FY12, down on the pcp (A$247.8m) due to FY11 including the A$101.7m King of Prussia profit and a A$21.0m US litigation provision in 1H12. Europe achieved EBITDA of A$114.5m (FY11: A$149.3m), the decline again primarily due to less capital recycling. We expect conditions in these regions to remain weak, but this is unlikely to materially impact group. Earnings and target price revision EPS: FY %, FY14: +1.0%, FY15: +2.8%, reflecting improved performance in Australian construction. Target price increased A$0.23cps to A$9.05 in line with this. Price catalyst 12-month price target: A$9.05 based on a Sum of Parts methodology. Catalyst: Confirmation of tenants for Tower 3 at Barangaroo. Action and recommendation The FY12 result was largely in line with components such as the lower tax rate well flagged by the group. Trading at ~9.1x FY13E with tangible earnings drivers (discussed above) heading into FY13, we reiterate our Outperform recommendation. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website

2 Fig 1 FY12 in line, FY13 growth looks solid FY12 result above top end of previous range. LLC reported an FY12 operating profit after tax of A$507.2m (Macquarie forecast A$499.8m), up ~5% YoY. After adjusting for property revaluations of A$5.8m, statutory profit after tax was A$501.4m. The operating result is above the top end of the A$ m guidance range provided on July 2. At an underlying or recurring level, profit growth was even stronger at ~8% as discussed herein. FY13 has some tangible drivers. We have completed a detailed analysis (overleaf) of FY13 earnings to determine if the group can grow given a ~A$89.6m drag from a higher tax rate in FY13. Our analysis indicates the group can, driven by additional capital recycling (~A$19.0m), unwinding the US litigation provision (A$21.0m), unwinding the residential impairment (A$27.7m), and underlying earnings growth of ~10% driven by Sunshine Coast initial fees (~5%). Barangaroo progressing Barangaroo is progressing, with the group finalising major supply contracts and core construction work to commence in November 2012 (tower 1) and CY13 (tower 2). The 750m perimeter basement retention wall was completed on schedule in May Detailed planning and design is also in progress on the first two residential buildings. and in discussions with tenants for tower 3. The group highlighted that it is still in discussions with prospective tenants for tower 3. In a recent GPT note (available here), we highlighted that PwC is a potential candidate for the precinct, currently leasing 39,370sqm at Darling Park 2. Valemus exceeding expectations Australian operating profit increased ~53% on pcp to A$429.9m due to the full-year contribution of the infrastructure business (ie, the Valemus acquisition that settled in March 2011). While management declined to provide specifics, the integration of this business was reported to be progressing well, with the business delivering results above expectations (an improvement from the in line with expectations at 1H12). and improving the profitability ratio. Key second half project contributors in the Australian construction business included the Queensland Children s Hospital and Mackay Base Hospital in QLD; Macleay River Bridges in NSW; and City Central Tower 8 in SA. With these projects, the profitability ratio (EBITDA GPM) improved again to 63.6% (59.4% in 1H12 and 51.7% FY11). This is supported by an increase in the lookthrough EBITDA margin from 3.5% in FY11 to 4.8% in FY12. Reasonably optimistic construction outlook. LLC continues to expect the Australian construction market to grow at >7% over the next few years and, with a number of competitors encountering financial difficulties, to at least maintain its market share. However, management noted recent press and economic commentary of a slowdown in resource project investment and will keep an eye on this but notes the group is underweight resource infrastructure. Asia strong off a low base. Operating profit increased ~130% to A$106.2m despite a A$1.7m negative foreign exchange movement due to a A$38.9m increase in operating profit in the investment management division and A$11.4m turnaround in the development division (Singapore- and Malaysia-led). This was the result of an increase in fees from development projects and the recognition of deferred proceeds and completion adjustments associated with the sale of LLC's 25% stake in PoMo. Setia City Mall in Malaysia off to a good start. The A$190.0m end value shopping centre opened in June (99% retail space leased on opening). It is a mid-market centre with ~69,000sqm and ~230 retailers. The site is 50% held by the LLC ARIF and 50% by Malaysian property developer S P Setia. Planning application for Elephant & Castle lodged. The group has lodged a planning application for the residential scheme at the Elephant & Castle site in London. Residential conditions were said to be stabilising in the London market. Group backlog and FUM up on pcp. Looking at backlog construction revenue and FUM post-year-end, both were up ~A$2.0bn and ~A$3.4bn respectively once adjusting for Sunshine Coast Hospital and the ~A$2.0bn Barangaroo wholesale fund. This is a solid outcome in a difficult backdrop. Source: Macquarie Research, August 2012 The good The not-so-good The interesting Cash flow weak but lumpy by nature. Operating cash flow turned negative in the half, with reported cash flow for the year of negative A$46.1m, impacted by a A$481.9m working capital charge. This does, however, include a A$249.1m increase in inventories (broadly consistent with the A$269.7m net development expenditure included in operating cash flow), reflecting the lumpiness of cash receipts and payments on construction contracts. The group anticipates positive operating cash flow in FY13 reflecting initial receipts at Barangaroo. Weak residential/development results. Operating profit from development was down marginally on pcp despite the inclusion of previously unrecognised tax deductions associated with the retirement and aged care businesses as flagged at the 1H12 result. Unsurprisingly, the residential part of the business was impacted by weak consumer sentiment, longer conversion times, and high levels of discounting. The outlook was also not encouraging, with management expecting difficult trading conditions to continue, with VIC still slowing, QLD not yet recovering, and NSW only strong at affordable price points. Five projects impaired. The weakness in residential markets led to a A$27.7m impairment on five projects in NSW, QLD, and SA being recognised above the line. Adjusting for this impairment, profit from Australian development was actually up ~17% on FY11. Australian development margins go diving. While the inclusion of commercial earnings in the development business muddies margin analysis somewhat, the overall Australian development EBITDA margin in FY12 was only 19.0% (accounting for the impairment), down substantially from 26.0% in FY11 and 20.9% in 1H12. Europe still struggling. Europe operating profit fell ~26% to A$101.9m primarily due to a A$2.2m adverse foreign exchange impact and a reduction in asset sale profits (five UK PPP assets and Chelmsford Meadows were sold in FY12 compared to 11 PPP and two other assets in FY11). The sale of LLC's stake in Greenwich Peninsula (announced in June 2012), was approved by the buyer's shareholders subsequent to year-end, and profit on this will be recognised in FY13 (~A$39.0m post-tax contribution). And King of Prussia hits Americas on the way out. Americas operating profit fell ~77% to A$36.0m given the FY11 result included the A$101.7m profit on the sale of LLC's King of Prussia stake. Excluding this, the earnings decline was ~34%, with the FY12 result including the impact of the investigation by the US Attorney's Office (A$21.0m provision recognised in 1H12) and a A$1.2m adverse foreign exchange impact. Difficult US conditions to continue. LLC noted difficult conditions are expected to continue in the US despite seeing early signs of recovery in key sectors such as residential and mixed use markets in Chicago, New York, and Washington DC. Management aims to grow the business from its current small base, and with the investigation expected to be completed in the next quarter, modest growth should be conceivable. Reported ROE still below target. LLC s FY12 ROE (statutory profit after tax weighted average equity) was reported to be 13.4%. While this is an increase from the 11.8% for 1H12, it remains below LLC s 15.0% target. We believe it may be difficult to reach this target in the near term given the broader backdrop. No progress on retirement sale. LLC continues to seek to sell its retirement portfolio but noted garnering interest from potential buyers remains difficult and that it is a tough market in which to be selling these assets. Capital recycling to continue. The group highlighted ~A$ bn of mature assets to be sold down over the next three years, indicating the level of capital recycling is likely to continue. We estimate ~A$139.0m in FY13 largely comprising profit on transfer of land at Barangaroo into an SPV and Greenwich Peninsula. Retirement valuation more conservative than FKP. Management commented that it was comfortable with its retirement asset valuations given its assumptions (13.5% discount rate, 3.9% price growth, and turnover of 11.0 years) are more conservative than FKP s revised assumptions. FKP now assumes a 12.5% discount rate, % price growth, and turnover of 10.0 years. Bluewater expansion not indicative of pending sale. The group indicated that a potential Bluewater expansion is being considered independently of a potential sale of the asset. LLC s stake increased in value by ~4% in the half, reflecting positive exchange rate movements. Trouble brewing with the unions. The group made comments today that since the abolition of the ABCC, the Fair Work Australia tribunal is not as stringent and has allowed the unions to be more aggressive. Work has ceased at the Children s Hospital project in Brisbane for the last three weeks. Keeping an eye on resources slowdown. The group highlighted that it will keep an eye on the current slowdown in resources capex spend to assess the impact on the infrastructure business. Given still a relatively small exposure to resources, we do not see this as a material issue at this stage. NY investigation not yet concluded. The New York State Attorney General s Office is seeking further information concerning the same investigations as have been ongoing. We understand this is the final component and should be concluded in the next quarter. LLC intends to cooperate with the inquiry and believes its provisioning is sufficient. 31 August

3 Where can we get to in FY13? We have analysed the earnings drivers for FY13 considering the group will be cycling a low tax rate in FY12 (~3%) and commentary that it will return to the mid to high teens (we have assumed ~17%) in FY13. We are of the view that the group will be able to grow earnings in FY13 despite this A$89.6m tax drag as indicated in the chart below. Fig 2 ~10% underlying growth in FY13, ~5% driven by Sunshine Coast fees (A$m) ~10% 'underlying' growth in FY13, ~5% driven by Sunshine Coast fees (89.6) FY12 NPAT (Actual) in tax rate in capital recycling US litigation provision Residential write-downs Sunshine Coast fees 'Underlying' growth FY13 NPAT (MRE) The drivers of our FY13 earnings estimate are: A$19.0m increase in capital recycling we currently estimate the group will achieve capital recycling of ~A$139.0m in FY13 (FY12: ~A$120.0m), reflecting profit on transfer of land into the SPV on two towers at Barangaroo (~A$80.0m), profit on the Greenwich stake sell down (~A$39.0m) and ~A$20.0m in general recycling activities during the year (post-tax). A$21.0m US litigation provision the group booked a ~A$21.0m US litigation provision in 1H12 relating to the US Attorney s Office enquiry into billing practices. Despite acknowledging in the contingent liabilities that the New York State Attorney General s office contacted LLC on July 17 seeking further information on the investigations, we regard this expense as one-off in nature. A$27.7m residential write-downs the group recognised an impairment in 2H12 relating to five projects (two in QLD, two in NSW, and one in SA). We similarly regard this as a one-off. A$20.8m Sunshine Coast fees the group will recognise a structuring and equity underwriting fee of ~A$21m in FY13. The structuring fee is ~1% of the ~$1.6bn project value and the underwrite fee is ~4.5% of LLC s ~A$80m commitment. A$24.3m in other growth with the above adjustments, we note we are forecasting remaining growth for the group of ~5%. We view this as achievable by the group despite the difficult backdrop. Based on the above analysis, we are of the view that our A$530.3m FY13 NPAT forecast is achievable by the group considering the tangible earnings drivers at the group s disposal this year despite the higher income tax rate. 31 August

4 FY12 result driven by lower tax rate as flagged LLC reported an FY12 operating profit after tax of A$507.2m (Macquarie forecast A$499.8m), up ~5% YoY. After adjusting for property revaluations of A$5.8m, statutory profit after tax was A$501.4m. The operating result is above the top end of the A$ m guidance range provided on July 2. A summary of the reported result with divisional commentary is provided below. Fig 3 Operating profit up ~5% despite residential impairment FY11 1H12 2H12 FY12 pcp Australia A$m % Asia A$m % Europe A$m (23.8%) Americas A$m (68.6%) Total corporate A$m (126.5) (60.3) (84.9) (145.2) 14.8% Total operating EBITDA A$m (6.6%) Depreciation & amortisation A$m (52.1) (37.6) (39.8) (77.4) 48.6% Operating EBIT A$m (11.0%) Net interest expense A$m (37.8) (31.9) (27.7) (59.6) 57.7% Tax A$m (138.3) (60.7) 41.3 (19.4) (86.0%) Other A$m 2.8 (0.1) (96.4%) Operating profit after tax A$m % Property revaluations A$m 7.5 (3.0) (2.8) (5.8) (177.3%) Statutory profit after tax A$m % EFPOWA m % Operating EPS A cps % DPS A cps % Payout ratio % 40.9% 41.4% 43.9% 42.8% 195bps In addition to the usual lumpy capital recycling profits, the FY12 result included A$5.3m of adverse foreign exchange impacts, a A$27.7m residential inventory impairment, tax deductions relating to the retirement business, and a A$21.0m provision (recognised in 1H12) for settlement of the investigation by the US Attorney s Office. At an underlying or recurring level, then, the profit growth was even stronger at ~8% as shown below. Fig 4 Underlying profit up ~8% FY11 1H12 2H12 FY12 pcp Reported operating profit after tax A$m % Add back: Adverse foreign exchange impacts A$m (81.8%) Add back: Residential inventory impairment A$m nmf Add back: Provision for settlement of NY investigation A$m % Adjusted operating profit after tax A$m % 1. A$5.0m pre-tax at assumed 30% tax rate As usual, this result included a number of asset sales: 1H Collins Street in Melbourne, the New Zealand retail assets, SA New Schools PPP, three UK PPPs, and Chelmsford Meadows; and 2H12 stake in APIC2, and two UK PPPs. While the profit on each of these individual sales is embedded in the respective business EBITDAs, we understand the total post-tax profit from profitable recycling of capital was A$120.0m (~24% of operating profit), which also included deferred proceeds and completion adjustments associated with the sales of PoMo and King of Prussia. These profits are obviously lumpy and difficult to predict; however, we assume ~A$139m (after tax) of capital recycling profits in our FY13 forecasts. LLC suggested it would be recycling A$ bn of capital to fund a commensurate level of project investments over the next three years. 31 August

5 Fig 5 Capital recycling normalises after King of Prussia FY09 1H10 2H10 FY10 1H11 2H11 FY11 1H12 2H12 FY12 Operating profit after tax excluding capital recycling A$m Capital recycling contribution A$m Net operating profit after tax A$m Portion of NPAT from capital recycling % 21% 19% 21% 20% 40% 41% 41% 21% 26% 24% Barangaroo is progressing, with the group finalising major supply contracts and construction work to commence in November 2012 (tower 1) and CY13 (tower 2). The 750m perimeter basement retention wall was completed on schedule in May Detailed planning and design is also in progress on the first two residential buildings, expected to be launched in 2013 and completion in line with the commercial buildings. Australia 64% operating profit contribution Operating profit increased ~53% on pcp to A$429.9m due to the full-year contribution of the infrastructure business (i.e., the Valemus acquisition that settled in March 2011). While management declined to provide specifics, the integration of this business was reported to be progressing well, with the business delivering results above expectations (an improvement from the in line with expectations at 1H12). There remains, however, a couple of years to run on this integration at a cost of ~A$20.0m pa, with a payback period of approximately two years for most initiatives. Fig 6 Australian growth strong but development flat despite tax benefit Revenue EBITDA OPAT FY11 FY12 FY11 FY12 pcp FY11 1H12 2H12 FY12 pcp Development A$m (61.8%) (0.4%) Construction A$m 4, , % % Investment management A$m % % Infrastructure development A$m (12.5) 7.6 nmf (9.5) 7.8 (3.1) 4.7 nmf Total Australia A$m 5, , % % Operating profit from development was down marginally on pcp despite the inclusion of previously unrecognised tax deductions associated with the retirement and aged care businesses as flagged at the 1H12 result. While the result is muddied by the inclusion of both residential and commercial development as well as retirement and aged care, it appears from the table below that these tax deductions were substantial, particularly in the second half. Fig 7 Big tax boost in 2H12 FY11 1H12 2H12 FY12 pcp Reported profit after tax A$m (0.4%) Add back: Residential inventory impairment A$m nmf Adjusted profit after tax A$m % Less: Adjusted profit before tax A$m (182.4) (47.9) (38.9) (86.8) (52.4%) Implied tax benefit/(expense) A$m (23.4) nmf Unsurprisingly, the residential part of the business was impacted by weak consumer sentiment, longer conversion times, and high levels of discounting leading to a A$27.7m impairment on five projects (two in NSW, two in QLD and one in SA). Adjusting for this impairment, profit from this business was up ~17% on FY11. However, the outlook for this business was not encouraging, with management expecting difficult trading conditions to continue, with VIC still slowing, QLD not yet recovering, and NSW only strong at affordable price points. Despite these conditions, total settlements saw a respectable ~4% increase to 2,582 over the year, although land settlements fell ~10% to 2,059 lots while built-form settlements more than tripled to 523 units due to the timing of project completions (which depressed the 1H12 result). Key completions include Convesso and Serrata at Victoria Harbour and silk and Antias at Jacksons Landing. 31 August

6 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Macquarie Private Wealth Pre-sales correspondingly fell from 2,335 at 1H12 (inflated by 465 at Convesso) to 1,759 at FY12, implying a weaker carry-forward position heading into FY13. As shown below, however, LLC has on average settled ~164% of starting contracts on hand in each year since FY08 (excluding the stimulus- and interest rate-boosted FY10). Carrying this average into FY13 would imply 2,884 settlements, consistent with management expectations for an increase in settlements (underpinned by new project launches). Fig 8 Increased settlements in FY13 not unfeasible FY07 FY08 FY09 FY10 FY11 FY12 FY13 Contracts on hand at end of prior year # 851 1,825 1,579 1,072 1,515 1,960 1,759 FY settlements # 2,765 3,387 2,771 2,892 2,471 2,582 2,884 Settlements as % of contracts on hand % 324.9% 185.6% 175.5% 269.8% 163.1% 131.7% 164.0% 1 1. Simple average excluding FY07 (pre-gfc) and FY10 (boosted by government stimulus and interest rate reductions) This increased volume, however, is expected to come at the expense of prices (which are expected to fall) as management focuses on the affordable segment. This would follow 3% average land lot price growth to A$223,600 and a 12% average built-form price fall to A$1,051,000 in FY12. Indeed, the average value of pre-sales is A$371,575, the lowest since 1H10, albeit product mix no doubt plays a role. This does not augur well for margins, and while the inclusion of commercial and retirement earnings in the development business muddies margin analysis somewhat, we note the overall development EBITDA margin in FY12 was only 19.0% (accounting for impairment), down substantially from 26.0% in FY11 and 20.9% in 1H12. The retail/commercial business commenced construction at the A$330.0m Craigieburn Central shopping centre development in VIC, owned by APPF Retail (75%) and LLC (25%). The centre will feature ~55,000sqm of retail and is scheduled to open in late The retirement business achieved 195 new unit sales (down from 224 in FY11) and 812 resales (up from 707). Aged care occupancy improved from 94.5% at June 2011 and 94.7% at December 2011 to 96.0% at June Interestingly, management commented that it was comfortable with its retirement asset valuations given its assumptions (13.5% discount rate, 3.9% price growth, and turnover of 11.0 years) are more conservative than FKP s revised assumptions. Construction earnings were more than double the result in the pcp, boosted by a full-year contribution from the infrastructure/valemus business. Key project contributors in the second half included the Queensland Children s Hospital and Mackay Base Hospital in QLD; Macleay River Bridges in NSW; and City Central Tower 8 in SA. With these projects, the profitability ratio (EBITDA GPM) improved again to 63.6% (59.4% in 1H12 and 51.7% FY11). This is supported by an increase in the look-through EBITDA margin from 3.5% in FY11 to 4.8% in FY12. This margin is expected to remain stable going forward. Fig 9 Valemus boosts backlog GPM and profitability ratio A$800m A$700m A$600m A$500m A$400m A$300m A$200m A$100m - Backlog GPM (LHS) Profitability ratio (RHS) 90% 80% 70% 60% 50% 40% 30% 20% 10% -% Note: Backlog GPM is not disclosed from 1H12 (only backlog revenue). We have applied the average of the FY10 and FY11 ratios of backlog GPM to backlog revenue (5.5% and 7.2% respectively) to estimate backlog GPM in 1H12 and 2H12. We understand the backlog GPM margin typically tracks at % in Asia Pacific. 31 August

7 The business has backlog revenue of A$9.3bn (pre-the A$1.6bn Sunshine Coast University Hospital), which is up ~8% on the A$8.6bn at June 2011 but down on the A$9.9bn at December 2011 as expected. This comprises A$6.7bn of backlog revenue in the infrastructure business and A$2.6bn in the PM&C business, which includes the basement works and first tower of Barangaroo. The outlook for this business was reasonably optimistic, with LLC continuing to expect the Australian construction market to grow at >7% over the next few years and, with a number of competitors encountering financial difficulties, to at least maintain its market share. However, management noted recent press and economic commentary of a slowdown in resource project investment and will keep an eye on this but notes the group is underweight resource infrastructure. Investment management saw a ~44% increase in operating profit primarily due to the profit from the sale of the group s interest in the New Zealand retail portfolio and strong performance from the Australian platform. LLRPA was launched in June 2012 with A$186.6m in equity commitments to invest in sub-regional retail centres, and a further A$2.0bn of equity commitments were raised subsequent to year-end for the funding and development of the first two towers at Barangaroo. Both of these should support earnings in this division going forward. FUM now stands at A$8.8bn (A$10.8bn including the Barangaroo commitment), up from the A$8.5bn at December After returning to profitability in the first half, the infrastructure development business was lossmaking in the second due to project bid costs. LLC secured the Darwin Marine Supply Base project in the NT during the year, as well as the A$2.0bn Sunshine Coast University Hospital in QLD subsequent to year-end. Fees from both projects should theoretically support earnings from this business going forward. Asia 16% operating profit contribution Operating profit increased ~130% to A$106.2m despite a A$1.7m negative foreign exchange movement due to a A$38.9m increase in operating profit in the investment management division and A$11.4m turnaround in the development division (Singapore- and Malaysia-led). This was the result of an increase in fees from development projects and the recognition of deferred proceeds and completion adjustments associated with the sale of LLC's 25% stake in PoMo. Fig 10 All divisions show growth in Asia Revenue EBITDA NPAT FY11 FY12 FY11 FY12 pcp FY11 1H12 2H12 FY12 pcp Development A$m (0.4) 14.9 nmf nmf Construction A$m % % Investment management A$m % % Total Asia A$m % % The turnaround in the development business is attributed to increased development fees from the Setia City Mall (completed in May 2012) and Jem projects. The result also includes a development revaluation gain on Jem, which is progressing will with the office space fully leased and 88% of the retail space leased (half at 1H12). Construction saw a ~61% increase in operating profit after tax due to contributions from telecommunications rollout work across Japan, Jem (Singapore), Stamford American International School (Singapore), and Corning Display Technologies (Taiwan). All except Jem are key components of A$0.7bn of backlog revenue. The investment management division was principally boosted by the ~A$15.0m profit on the partial sale of LLC s interest in APIC2 in June The result also includes the recognition of deferred proceeds and adjustments associated with the sale of LLC s interest in PoMo. FUM declined slightly to A$1.9bn. 31 August

8 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Macquarie Private Wealth Europe 15% operating profit contribution Operating profit fell ~26% to A$101.9m primarily due to a A$2.2m adverse foreign exchange impact and a reduction in asset sale profits (five UK PPP assets and Chelmsford Meadows were sold in FY12 compared to 11 PPP and two other assets in FY11). The sale of LLC's stake in Greenwich Peninsula (announced in June 2012), was approved by the buyer's shareholders subsequent to year-end, and profit on this will be recognised in FY13 (~A$39.0m post-tax contribution). Similarly to the 1H12 result, construction was the only division reporting an increase in profit, with the investment management run rate slowing and dramatic earnings declines in development (~96%) and infrastructure development (~45%). That said, at the EBITDA line, the result was ahead of our forecast, and we expect European EBITDA of A$100.1m (excluding capital recycling) going into FY13. Fig 11 Europe still struggling despite only A$2.2m adverse currency impact Revenue EBITDA OPAT FY11 FY12 FY11 FY12 pcp FY11 1H12 2H12 FY12 pcp Development A$m (3.8) (176.0%) 4.7 (2.0) (95.7%) Construction A$m 1, , % % Investment management A$m % (6.1%) Infrastructure development A$m (47.6%) (44.7%) Total Europe A$m 1, , (23.3%) (25.8%) The development business reported an operating profit of A$0.2m compared to a A$4.7m profit in the pcp due to the inclusion in FY11 of a ~A$5.0m post-tax profit on the sale of LLC s interest in the Pier Walk office building. A jump to 245 settlements (55 in FY11 and 10 in 1H12), predominantly relating to residential sales at Greenwich Peninsula underpinned the return to profitability in the second half. Key projects such as Elephant & Castle (planning application submitted in March 2012) and the International Quarter are being progressed. Construction earnings almost doubled, reflecting improved profitability in the business (EBITDA GPM of 29.9% in FY12 compared to 24.0% in FY11 and 25.8% in 1H12). Key contributors during the period included the Athletes Village (now handed over to the Olympic Delivery Authority), Birmingham Building Schools for the Future program, UK Ministry of Defence projects, and BP Global Alliance project across Europe. Backlog revenue increased to A$1.3bn, with the following new projects secured during the half: Chiswick Park commercial development, Strathclyde University Technology & Information Centre, and six schools within the Birmingham BSF program. Fig 12 Profitability ratio jumps in 2H12 A$400m A$350m A$300m A$250m A$200m A$150m A$100m A$50m - Backlog GPM (LHS) Profitability ratio (RHS) 60% 50% 40% 30% 20% 10% -% (10%) Note: Backlog GPM is not disclosed from 1H12 (only backlog revenue). We have applied the average of the FY10 and FY11 ratios of backlog GPM to backlog revenue (8.6% and 8.3% respectively) to estimate backlog GPM in 1H12 and 2H12. We understand the backlog GPM margin typically tracks at % in Europe. 31 August

9 Investment management saw a ~6% decline in operation profit despite receiving A$64.0m in proceeds from the sale of LLC s interest in Chelmsford Meadows, which was completed in December This profit was supplemented by Bluewater rental income and retail centre management fees. Management is in consultation with the community on a redevelopment of the centre but insisted the development program is independent of any decision to sell the asset. However, the group is open to offers and noted strong demand for quality London retail assets and that Bluewater would attract strong interest if it were placed on the market. While profit from the infrastructure development business was ~45% below FY11, the second half run rate improved dramatically, boosted by A$27.9m in proceeds from the sale of two UK PPP assets to its UKIF. Americas 5% operating profit contribution Operating profit fell ~77% to A$36.0m given the FY11 result included the A$101.7m profit on the sale of LLC's King of Prussia stake. Excluding this, the earnings decline was ~34%, with the FY12 result including the impact of the investigation by the US Attorney's Office (A$21.0m provision recognised in 1H12) and a A$1.2m adverse foreign exchange impact. LLC noted difficult conditions are expected to continue despite seeing early signs of recovery in key sectors such as residential and mixed use markets in Chicago, New York, and Washington DC. Management aims to grow the business from its current small base, and with the investigation expected to be completed in the next quarter, modest growth should be conceivable. Fig 13 Americas impacted by NY investigation and absence of King of Prussia Revenue EBITDA OPAT FY11 FY12 FY11 FY12 pcp FY11 1H12 2H12 FY12 pcp Development A$m (9.9) (8.7) (12.1%) (5.7) (0.6) (3.0) (3.6) (36.8%) Construction 1 A$m 1, , % 21.3 (1.3) (33.3%) Investment management A$m (89.0%) (89.5%) Infrastructure development 1 A$m % (29.9%) Total Americas A$m 1, , (68.6%) (77.0%) 1. FY11 re-stated to reflect changes to regional management structure The development business continued to be loss-making in the half due to costs associated with establishing the pipeline of projects in the DASCO business. Construction of DASCO s first project as part of LLC, Bon Secours St Francis Watkins Centre, was completed during the second half, with a further three projects to commence in the next six months. This result was somewhat offset by a A$1.3m profit from the incumbent residential and commercial project in Colorado. Encouragingly, the construction division returned to profitability in the second half despite trading conditions remaining difficult (reflected in no new key projects being secured in the half). Accordingly, backlog revenue fell from A$4.5bn in June 2011 and A$4.3bn in December 2011 to A$4.0bn in June The profitability ratio also declined ~800bps in the half to be 29.4% for the full year. 31 August

10 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Macquarie Private Wealth Fig 14 Profitability ratio trending back down A$350m A$300m A$250m A$200m A$150m A$100m A$50m - Backlog GPM (LHS) Profitability ratio (RHS) 60% 40% 20% -% (20%) (40%) (60%) (80%) (100%) (120%) Note: Backlog GPM is not disclosed from 1H12 (only backlog revenue). We have applied the average of the FY10 and FY11 ratios of backlog GPM to backlog revenue (5.1% and 2.6% respectively) to estimate backlog GPM in 1H12 and 2H12. We understand the backlog GPM margin typically tracks at % in the Americas. The investment management business earnings represents LLC s share of operating income from the King of Prussia mall prior to completion of the sale as well as completion adjustments arising from finalisation of the sale. It is logical, then, that the run rate slowed significantly HoH. Operating earnings from the infrastructure development business were down ~30% on FY11, with the run rate halving in the second half. Activity in the half was limited, with the financial close on the second phase of the Privatization of Army Lodging program the only addition to the list of key events compared to the first half. Cash flow and balance sheet Operating cash flow turned negative in the half, with reported cash flow for the year of negative A$46.1m, impacted by a A$481.9m working capital charge. This does, however, include a A$249.1m increase in inventories (broadly consistent with the A$269.7m net development expenditure included in operating cash flow), reflecting the lumpiness of cash receipts and payments on construction contracts. The group anticipates positive operating cash flow in FY13 reflecting initial receipts at Barangaroo. Gearing increased to 6.5% at June 2012 (December 2011: 3.4%). The group maintained its investment grade credit rating with both Standard & Poors (BBB-) and Moody s (Baa3), with a stable outlook from both agencies. The group had cash and undrawn facilities of A$2.2bn at June 2012 (December 2011: A$2.4bn). LLC targets a gearing ratio below 20.0% and expects actual gearing to creep towards ~15.0% in the medium term as the group delivers on its considerable backlog. 31 August

11 Lend Lease financial estimates FY12 FY13E FY14E FY15E Development (formerly Communities) Asia Pacific Europe Americas Total Development Infrastructure Development (formerly PPPs) Asia Pacific Europe Americas Total Infrastructure Development (formerly PPPs) Investment Management Asia Pacific Europe Americas Total Investment Management Construction (formerly PM&C) Asia Pacific Europe Americas Total Construction (formerly PM&C) Total operating EBITDA Corporate Total EBITDA Earnings Per Share Distributions Per Share August

12 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 June 2012 AU/NZ Asia RSA USA CA EUR Outperform 55.67% 61.00% 53.43% 42.58% 69.23% 46.60% (for US coverage by MCUSA, 9.05% of stocks followed are investment banking clients) Neutral 30.50% 22.11% 36.99% 52.41% 28.02% 33.69% (for US coverage by MCUSA, 8.14% of stocks followed are investment banking clients) Underperform 13.83% 16.89% 9.59% 5.01% 2.75% 19.71% (for US coverage by MCUSA, 0.45% of stocks covered are investment banking clients) Company Specific Disclosures: Macquarie Bank Limited makes a market in the securities in respect of Lend Lease Corporation Limited. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Lend Lease Corporation Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at Analyst Certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General Disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN , AFSL No ) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. 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The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at 31 August