JLL - Jones Lang LaSalle: Taking A More Cautious View

Summary

• JLL's unfavorable revenue mix and the temporary halt on share repurchases are the key short term negatives for the stock.
• But the medium term business outlook for Jones Lang LaSalle is reasonably good based on a review of the company's 2025 financial targets.
• I am taking a more cautious view of Jones Lang LaSalle's short term outlook, which explains my decision for downgrading JLL's rating to a Hold.

Elevator Pitch

I have a Hold rating for Jones Lang LaSalle Incorporated's ( JLL ) shares.

With my earlier update for JLL published on October 13, 2022, I wrote about the growth prospects of Jones Lang LaSalle's JLL Technologies business, reviewed the sell-side's consensus Q3 2022 and FY 2022 forecasts for the company.

I downgrade my investment rating for Jones Lang LaSalle from a Buy previously to a Hold now. JLL's recent decision to put buybacks on hold and its high proportion of cyclical leasing revenue imply that the stock doesn't warrant a Buy rating. But Jones Lang LaSalle's intermediate term growth prospects are still pretty decent, so I have decided that a Hold rating for JLL is fair.

Unfavorable Revenue Mix

In the current weak economic environment, property services companies which derive a lower proportion of their top line from recurring revenue streams and a higher percentage of their sales from cyclical revenue streams will perform worse than their peers. This is the case with Jones Lang LaSalle.

JLL generated approximately 34% of its revenue for the third quarter of 2022 from leasing. In comparison, JLL's peers, CBRE Group, Inc. ( CBRE ) and Colliers International Group Inc. ( CIGI ) had leasing account for a relatively lower 22% and 25% of their top line, respectively in Q3 2022. It is reasonable to assume that real estate leasing revenue will experience a significant decline when the economy is doing poorly.

Separately, Jones Lang LaSalle earned 34% of its Q3 2022 sales from the PM/FM (Property Management/Facility Management) and investment management businesses which offer recurring revenue streams. In contrast, the investment management and PM/FM businesses contributed a higher 58% and 38% of CBRE's and CIGI's respective Q3 2022 revenues. This implies that JLL's quality of revenue is inferior to that of its peers.

The factors mentioned above have been incorporated into the Wall Street analysts' consensus financial projections for JLL. Jones Lang LaSalle is expected to witness a modest +0.9% increase in its top line for full fiscal 2023 as per S&P Capital IQ data. This pales in comparison with Colliers International and CBRE Group's consensus FY 2023 revenue growth rates of +2.7% and +3.7%, respectively.

Share Buybacks Put On Hold

Earlier, Jones Lang LaSalle revealed at its Q3 2022 investor call on November 2, 2022 that it has "temporarily paused" its share "repurchase activity" in view of "the uncertainty looking into 2023" and the meaningful amount of buybacks that have already been completed. JLL bought back around 6% of its shares outstanding for $750 million between Q3 2021 and Q3 2022.

Excellent shareholder capital return has been a key investment merit for JLL. In the past three years (2020-2022), Jones Lang LaSalle spent $1.1 billion on share repurchases, which is equivalent to about 58% of its cumulative free cash flow in this time frame. As a result of the company's substantial share buybacks, JLL's total shares outstanding were reduced by a significant 8% in the last three years. Also, Jones Lang LaSalle's $750 million share repurchases done in the past twelve months up to Q3 2022 translate into an appealing buyback yield of 8.5% based on JLL's current market capitalization of $8.8 billion.

Looking ahead, JLL could potentially place a stronger emphasis on M&A (Mergers & Acquisitions) and other investments as compared to share repurchases. At the company's 2022 Investor Briefing on November 16, 2022, Jones Lang LaSalle emphasized that share buybacks remain "a priority", but noted that "the timing of" repurchases "may fluctuate based on other opportunities for use of our capital in macro cycles."

In other words, there is a high probability of Jones Lang LaSalle choosing to allocating a relatively larger proportion of excess capital to organic and inorganic growth opportunities rather than share repurchases in the near future. This might diminish the appeal of JLL as a high shareholder capital return yield stock going forward.

Intermediate Term Financial Outlook Is Decent

JLL outlined the company's medium term financial targets at its recent 2022 Investor Briefing in the middle of November last year. Although Jones Lang LaSalle's near-term outlook (i.e. marginal consensus FY 2023 revenue growth) is challenging as discussed in an earlier section of this article, the company's prospects in the mid term are still decent.

The company is targeting to expand its fee revenue by a decent +7.0% CAGR from $8.0 billion for 2021 to $10.5 billion in 2025 (mid-point of financial goal), which appears to be realistic considering a few key metrics.

The World Bank predicts that the global urban population will increase from 4.4 billion now to approximately 6.0 billion in 2045; increased urbanization is a key secular growth driver for JLL.

Separately, only three in 10 companies currently outsource their property management as per JLL's management commentary at its 2022 Investor Briefing. As I mentioned earlier in this article, Jones Lang LaSalle derives a relatively lower percentage of its top line from recurring revenue streams as compared to its peers. This means that JLL has ample room to increase its revenue contribution from its PM/FM business, considering the potential outsourcing demand growth in the future.

Closing Thoughts

Jones Lang LaSalle's mid-term growth outlook is good, so a Sell rating will be too harsh. But a Buy rating for JLL isn't appropriate as well, taking into account its current unfavorable revenue mix. As a result, I have decided to assign a Hold rating to Jones Lang La Salle.

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