The share price of shopping centre landlord Intu Properties (LSE: INTU) has risen by more than 200% from the all-time low seen in March. There will be plenty of bargain-hunting investors who’ve doubled their money — at least — on the Intu share price.
Despite these gains, the Intu share price is still just 9.5p at the time of writing. That’s a 93% discount to its December book value of 140p per share.
Buying property below its book value is a classic value investing technique. Get it right and the profits can be huge. But if you get it wrong, you can lose everything.
Today I want to take a fresh look at Intu and explain what I’d do today.
What are Intu shares worth?
The company’s latest accounts date from 31 December 2019 and show a net asset value of £1,904m. In simple terms, this number is the difference between the value of the group’s property portfolio (about £6.5bn) and its debts (about £4.6bn).
These numbers mean that Intu ended last year with a loan-to-value ratio of about 68%. This is quite a high level of gearing for commercial property, but in better circumstances, it might be manageable. Unfortunately, circumstances today are about as bad as you can imagine.
Cash crunch
One problem is that Intu appears to be struggling for cash. Rent collections for the first quarter of 2020 were just 40% of the total amount due. Cash flow forecasts released by the company recently suggest to me that a number of its operating companies — including Metrocentre — could run out of cash this year.
Intu’s shortage of cash is what’s known as a liquidity crunch. If this was the only problem, the group would probably be able to secure some new funding to see it through the crisis. However, Intu hasn’t been able to do this.
The share price slumped in March when major shareholders refused to bail out the company with a £1bn+ equity raise.
Lenders don’t seem keen to lend Intu any extra cash, either. Indeed, it is currently trying to reach a ‘standstill agreement’ with lenders to protect the group from expected breaches of its loan conditions.
Property price collapse
Intu’s share price has fallen by more than 95% over the last five years, as investors have bailed out of a falling market for retail property.
Its net asset value has fallen from £5bn to £1.9bn in just two years. Unfortunately, debt investors appear to think that property prices could have further to fall.
Its bonds (loans) trade on debt markets, where they can be bought and sold. As I write, its debt is trading at a big discount to its face value. This normally means that lenders don’t expect to get all of their money back.
Why the Intu share price could go to zero
Intu faces a perfect storm. It’s in danger of running out of cash and its property portfolio is highly geared in a falling market.
Big shareholders have already refused to provide the fresh cash that would be needed to solve the group’s debt problem. I can’t see that changing.
In my opinion, there is only one likely outcome — lenders will take control of the group’s assets and the Intu share price will fall to zero. If I owned Intu shares, I would sell today.
