The reason why shares in Intu Properties (LSE:INTU) have fallen is obvious. The potential opportunity from investing in the company lies in the numbers, but whether you think Intu Properties (LSE:INTU) can fulfil this opportunity depends on the detail.
The reason
People are prone to exaggeration, but sometimes an extreme word like ‘collapse’ is entirely appropriate. Shares in Intu have collapsed. Five years ago they were trading at 362p, a year ago they were at 118p, now they are just 13p… yes 13p. There’s not a lot you can buy for 13p these days but you can buy an Intu share!
Five years ago, the company was valued at almost £5bn, today its market cap is £176m.
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The reason for the collapse isn’t hard to fathom. The retail sector isn’t what it used to be, business rates are at a level that too many retailers can’t afford and shopping is migrating online fast.
For Intu, which owns and manages shopping centres in the UK and Spain, this is a rather big problem.
The problem is compounded by the company’s net debt, currently around £4.7bn. The firm has now announced plans to raise money, probably around £1bn, although some question whether this will be enough.
There’s no doubt about it, Intu has big challenges. I wonder, however, whether these challenges are so blatantly obvious that they’re already factored in to the share price. In short, has the company become a bargain?
The potential
Intu’s potential is revealed in the balance sheet. Sure, total liabilities are £5.8bn, which is roughly six times greater than current assets, and even current liabilities (£735m) are perilously close to current assets (£926m). But its net asset value dwarfs the company’s market valuation.
Net assets are in fact £2.978bn. It’s this massive differential between net assets and market cap that presents the opportunity. From that point of view, the company looks cheap.
It depends
Whether Intu is truly undervalued by the markets depends on the future of retail.
If the trend we have seen in recent years, of high streets and shopping malls in decline, continues, then the outlook for Intu is not especially favourable. Bear in mind that its assets only need to see around 30% or so knocked off their valuation for the net asset value to fall to zero.
If Intu does raise a billion pounds and uses the money to pay-down debt, then its net assets would increasing significantly, giving its balance sheet a much bigger buffer.
I’m not convinced that the era of shopping centres is drawing to an end. Sure, change is afoot, but I worry about a time when we never need to go out because we can do everything we need from our computer screens.
Shopping centres can survive if they can also become meeting places — providing as many social activities as possible. Technologies such as augmented reality may give physical shopping a new lease of life too, complementing our view of the physical product.
Will Intu’s share price eventually rise to reflect its net asset value? That depends on whether its assets are subject to significant downward revaluations. And that depends on the future of shopping malls and how the assets Intu owns are adapted. Personally, I think there’s quite a lot of upside with this seemingly cheap stock.
