Value Destruction

Intu shows South African investors must watch debt when abroad

By David Whitehouse

Posted on March 10, 2020 07:39 (72) © The Trafford Centre shopping centre in Manchester, Britain, November 7, 2019. REUTERS/Jon Super
The Trafford Centre shopping centre in Manchester, Britain, November 7, 2019. REUTERS/Jon Super

On March 4, Intu said it would no longer try to raise up to 1.5bn pounds in equity, citing “the current uncertainty in equity markets and retail property investment markets.”

Intu is currently in compliance with its debt covenants but states that by July 2020 it could be in breach. Postponed full-year results will now be published on March 12.

Intu, worth nearly 13b pounds in 2006, now has a market cap of 60mn pounds. The company’s woes carry broader lessons for South African investors seeking overseas exposure, says Craig Smith, head of research and property at Anchor Stockbrokers in Johannesburg.

  • The keys are understanding the broad property cycle and “major trends and themes such as the impact of e-commerce on sub-optimal retail formats,” he says.

Excessive debt loads leave no hiding place when an unexpected crisis such as coronavirus spread market panic.

Coronavirus may accelerate the shift from malls to online shopping as people prefer or obliged to buy from home. E-commerce shares have held up well as bricks and mortar retail shares have tumbled.

Banks and bondholders will now play a crucial role in terms of Intu’s future, Smith says.

  • The worst-case scenario is further declines in property values which result in further erosion of underlying equity value within the business, Smith says.
  • “This is to some extent what the market is pricing in.”

Clear Message Needed

The Africa Report on November 8 said that Intu looked vulnerable to an opportunistic low-ball bid and that existing shareholders should get out while they could. The second part of that was more accurate than the first: no buyers have appeared, and the shares have since fallen from 35p to 4.5p in London.

Coronavirus has accelerated the share price crash, but debt is the fundamental problem.

  • “This out-turn was broadly anticipated by us even without the recent sell-off due to the Coronavirus,” according to a note from Goodbody in Dublin.
  • Intu is now on a “knife edge” in terms of respecting its covenants, Goodbody says.
  • Some have simply given up on Intu. Richard Hasson, co-head of Electus Fund Managers in Cape Town, says the firm stopped covering Intu a year ago as it was considered it uninvestable due to its excessive debt ratios.

The company says it has received expressions of interest to explore “alternative capital structures and asset disposals.” According to Smith, management now needs to focus on the underlying operations of the business and engage with banks, equity investors, tenants and employees to ensure a consistent and message that is put forward to the market.

  • The best-case scenario, he says, is a solution to fix the current capital structure by reducing gearing, which could be via a combination of asset sales and equity raising.

Bottom Line: A clear asset disposal strategy is now essential to maximise the chances of salvaging some value for Intu shareholders.


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