Intu - Still more pain to come?

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Intu announced its half year results this morning. Like for like rental income has reduced by 7.7% well in excess of the Company’s previous full year guidance of 4% - 6%.

 The portfolio valuation is down by over 7.5% in the first six months of the year.

I have been forecasting, since the full year results announcement in February, that increasing yields together with falling rental income make covenant breaches all but inevitable. The business is apparently in full cash preservation mode (no dividend and redundancies reportedly being considered) and it is hard to see the share price recovering before the property market.

The first half figures from Intu for rental income have always been weaker than the second half but extrapolating to get an estimate of the 2019 full year figures based on the first /second half revenue ratio from last year gives full year revenue of about £605 million and suggests a full year drop in the valuation, even with no further outward yield shift of 14% between December 2018 and December 2019. That is driven by a vacancy rate that has increased from 3.3% to 4.9% which both reduces revenue and increases irrecoverable costs. There will also be increased tax costs because of the (temporary) loss of REIT status.

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The trajectory remains clear, the falls in rental income are, in my mind, set to continue. That negative pressure will continue to reduce investor appetite for retail, so further outward yield shift is likely.

The management has announced a new five-year strategy for a business which will do well to last for another 5 months.

In my view this is now a full turnaround situation, the management is facing covenant breaches and unless it acts faster than it seems to be at the moment, a complete breakup, possibly at fire sale prices, or a deeply discounted rights issue is becoming increasingly likely.

Either way further reductions in shareholder value are almost inevitable.

#Intu #ReceptConsult #cre