A big valuation discount fails to excite the market as shopping centres owner Intu Properties (INTU) sits flat at 326.96p amid a mixture of good and bad news. There's no growth in the dividend, despite profits more than doubling from £159 million to £364 million in 2013. And there's a warning that rental income will fall during 2014.
Liberum Capital says the reduction in both earnings per share (down 6.8% to 15p) and 3% drop in net asset value (NAV) to 380p, despite an improving investment and occupational market in 2013, 'underlines the structural challenges' facing the business.
Investors would normally jump on companies that trade at a significant discount to NAV – 14% in the case of Intu – but this stock hasn't attracted the market's attention. Liberum says Intu's NAV discount is justified by value destruction. 'A total return of only 0.8% in 2013 from NAV growth and dividends marks the third consecutive year that Intu has failed to meet our 8.5% cost of equity hurdle,' says the investment bank.
Intu has a £1.2 billion UK development pipeline which should see new assets come to market in the next decade. This will be funded through disposals and by forming joint ventures. Intu Uxbridge, which is currently up for sale, saw a modest 1% revaluation uplift in the second half of 2013 and is now held at an initial yield of 5.5%.
It bought Midsummer Place in Milton Keynes during the financial year. The company adds that it is: 'on site transforming the malls at intu Eldon Square, remodelling the intu Lakeside food court, refurbishing intu Victoria Centre and reinvigorating what we now call Platinum Mall at intu Metrocentre.'
Refurbishments aren't a guaranteed ticket to success, as evident by the falling valuation at its shopping mall in Bromley, formerly known as the Glades. It says the site hasn't yet benefited from the valuation impact of committed refurbishment expenditure.
Liberum reckons Intu may have to undertake a rights issue to fund the potential purchase of Westfield's Derby and Merry Hill shopping centres, 'although we do not expect a deal to address our fundamental concerns regarding demanding valuations, an over-leveraged balance sheet and no momentum in EPS and dividends.'