Sandstone Insights: ACCC raises concerns over Stockland's proposed acquisition of Lend Lease communities

ASX code: SGP

Suggestion: Buy

Need to know

• The ACCC released comments on SGP's proposed acquisition of 12 Lend Lease Corporation (LLC) community assets
• The comments suggest concern around four key geographies
• These geographies represent approximately 26% of lots
• A revision in the deal is likely to be earnings neutral in FY25, but shrinks the total size of the prize.

ACCC update

• Communities acquisition: the ACCC announced its concern about how SGP’s acquisition of 12 LLC communities could reduce competition in four key areas.
• Both LLC and SGP believe they have compelling reasons why it doesn’t lessen competition and will engage with the ACCC to address these views. This raises the potential of LLC retaining several of the communities.
• Impact: it now becomes a 2H25/FY26 earnings story. Communities in the ACCC areas of concern represent approximately 26% of the lots.
• Earnings neutral in FY25 at almost any size. Any divestment would limit medium-term upside which we think could be a 40% uplift in annual housing sales or an A$100-150 million boost to housing EBIT in FY26/27.

Investment view

Stockland continues to benefit from residential supply shortage tailwinds and migration (albeit slowing). We suspect that Stockland should provide meaningful growth to settlements and earnings over the longer term. The market is forecasting a high single-digit FFO growth out to FY27e with a 20% uplift in settlements from FY25. The potential easing of interest rates later in 2024 will likely provide a tailwind to volumes, the multiple SGP trades at.

SGP trades on a 13x P/FFO with an NTM dividend yield of 5%. SGP has displayed a clear pathway to sustained FY25 onward earnings growth. In our view, the market will be comfortable with the above long-term average multiple given the strong growth profile and the difficulties seen in other commercial real estate market segments.