JLL - Jones Lang LaSalle Is A Hold For Now

2023-05-22 07:07:02 ET

Summary

• I am of the view that Jones Lang LaSalle could potentially disappoint the market by reporting a lower-than-expected EBITDA margin for full-year FY 2023.
• On the other hand, I have a favorable opinion of JLL's capital allocation moves and the company's new CTO appointment.
• I retain a Hold rating for Jones Lang LaSalle, after considering its operating profitability target, share buyback resumption, and the creation of a new CTO role.

Elevator Pitch

My investment rating for Jones Lang LaSalle Incorporated's ( JLL ) stock remains as a Hold.

I highlighted my "cautious view of the company's short-term outlook" with my prior February 2, 2023 write-up , which was validated with Jones Lang LaSalle's most recent Q1 2023 earnings miss .

In this latest article, I choose to maintain my Hold rating for JLL, considering the stock's current risk-reward. On the positive side of things, Jones Lang LaSalle's current valuations are appealing as evidenced by the resumption of share repurchases, and its long-term growth prospects in the area of technology have been boosted with the appointment of a new CTO. On the negative side of things, Jones Lang LaSalle's Q1 2023 performance was poor, and there is a significant risk that JLL will miss its full-year EBITDA margin target.

Meeting Operating Profitability Guidance Appears To Be Challenging

Jones Lang LaSalle reiterated the company's "full year 2023 target adjusted EBITDA margin (guidance in the) range of 14% to 16%" at its Q1 2023 earnings call in early May.

In my opinion, it will be tough for JLL to meet its EBITDA margin guidance for FY 2023.

Firstly, Jones Lang LaSalle's below expectations Q1 2023 financial performance implies that the company has to play serious catch-up to achieve its full-year operating profitability guidance.

As indicated in its most recent quarterly earnings press release , JLL's normalized EBITDA fell -60% YoY from $273.6 million for Q1 2022 to $109.0 million in Q1 2023. Notably, Jones Lang LaSalle's actual non-GAAP adjusted EBITDA came in -36% lower than the Wall Street analysts' consensus forecast of $171 million (source: S&P Capital IQ ). Adjusted for foreign exchange effects, JLL's adjusted EBITDA margin declined by -7.8 percentage points to 6.6% in the most recent quarter, and this was way below its FY 2023 EBITDA margin guidance (14%-16%).

Secondly, JLL's sales mix is sub-optimal, and this could potentially be a drag on its operating profitability going forward.

In my previous early February article, I have already mentioned about Jones Lang LaSalle's "unfavorable revenue mix" with "a lower proportion of" its "top line (derived) from recurring revenue streams." JLL also acknowledged in its Q1 2023 results press release that "the decline in transaction-based revenue, specifically Leasing, Investment Sales, and Debt/Equity Advisory" was the key factor driving EBITDA margin compression for the company in the recent quarter.

It is worthy of note that Return To Office or RTO momentum has been much slower than expected in specific markets, which has had a negative impact on JLL. Jones Lang LaSalle's leasing revenue dropped by -18% YoY in local currency terms for the first quarter of 2023. The company disclosed at its Q1 2023 results call that Europe's average RTO percentage has only returned to 65%-70% of pre-pandemic levels, while it noted that the RTO metric for the San Francisco Bay Area is merely 30%-40% of what it was before the COVID-19 outbreak.

In other words, it is reasonable to assume that lower than expected "transaction based revenue", especially relating to the office market, might lead to below expectations EBITDA margin for JLL as a result of negative operating leverage.

Thirdly, there are risk factors that are beyond Jones Lang LaSalle's control.

At the company's recent first quarter earnings briefing, JLL specifically highlighted "geopolitical disruption" and "turmoil in the banking sector" as significant risks which could prevent it from meeting its full-year operating profitability goal.

In summary, my bet is on Jones Lang LaSalle's actual FY 2023 EBITDA margin falling short of analysts' expectations based on the above-mentioned factors.

Eyes On Capital Allocation And New CTO Appointment

Although I am wary about the downside risk associated with an EBITDA margin miss for JLL, I have a positive view of Jones Lang LaSalle's capital allocation approach and new CTO appointment.

Jones Lang LaSalle stressed at its most recent quarterly results briefing that it always compares "the return available from repurchasing your own shares relative to that with potential M&A transactions" in determining the company's capital allocation priorities. As such, it is telling that JLL has made a decision to resume share buybacks ($1.2 billion of share repurchase authorization remaining) in Q2 2023, which sends a strong signal about the stock's undervaluation. As a reference, Jones Lang LaSalle currently trades at 10.2 times consensus forward next twelve months' normalized P/E, and this is significantly below its 15-year mean normalized P/E ratio of 14.6 times (source: S&P Capital IQ )

Separately, JLL announced on May 11, 2023 that it has appointed Yao Morin as Chief Technology Officer or CTO, which is a "newly created role" as highlighted in the announcement. The latest CTO appointment suggests that Jones Lang LaSalle isn't losing sight of long-term growth opportunities despite short-term headwinds. At the company's 2022 Investor Day in November last year, JLL cited the results of a survey highlighting that "78% of companies plan to incorporate CRE (Commercial Real Estate) tech into their portfolios by 2025." For example, decarbonization is becoming a top priority for corporates, and JLL can capitalize on this trend by investing in initiatives relating to building energy efficiency led by its new CTO.

In a nutshell, Jones Lang LaSalle is making the right decisions relating to capital allocation and growth strategy. JLL is reinitiating buybacks when its shares are undervalued; while its new CTO appointment will allow the company to have someone to oversee its technology-related projects.

Concluding Thoughts

There are both positives and negatives associated with a potential investment in Jones Lang LaSalle's shares. Taking into account multiple factors such as its short-term profitability, technology-related growth opportunities, and its valuations, a Hold rating for JLL is justified.

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