Exane Issues Undeperform Note on Intu Properties But Says Hammerson Could Buy It… The Day the Deal is Announced

Hammerson announced a recommended offer for Intu Properties, the exact same day Exane BNP Paribas’s Michael Burt says « Hammerson is the most obvious acquirer for Intu » in a report date Dec 6 (at 6:18am), yet adding M&A is not an option.

Here are the key points from the 40 page report sent out to investors today:

« Could Intu do a Corio?

Intu has underperformed the European real estate sector by 35% YTD and trades at a 48% discount to spot NAV. This evokes memories of former retail REIT Corio, another perennial underperformer before it was acquired by Klépierre in 2014. Corio’s turnaround was founded on self-help, followed by a bid. It is difficult for Intu to repeat the same trick.

Intu’s problems have not been addressed

We have a number of concerns regarding the Intu investment case; (1) LfL rental growth guidance of 2-3% p.a. is too optimistic, (2) the dividend is uncovered on a cash basis, (3) we expect UK shopping centre yields to rise, (4) development has been unprofitable and capex is set to increase significantly and (5) leverage is unsustainably high.

Self-help is needed but would require a fundamental change of strategy

Significant disposals are required to address concerns over Intu’s asset quality and LTV. However, this appears unlikely given the stress it would place on the dividend.

M&A to the rescue? We think not

Hammerson is the most obvious acquirer for Intu, however the strategic fit is far from perfect given Hammerson’s deliberate move away from the UK in recent years. In an M&A scenario, relative value matters more than Intu’s significant NAV discount. After adjusting Intu’s FFO for legacy swap costs, it trades on the same P/FFO multiple as Hammerson. A combination would compromise Hammerson’s balance sheet, hijack the strategy and FFO accretion relies almost entirely on refinancing synergies. This does not make a compelling case for a merger.

Cheap for good reason, we remain at Underperform

After adjusting for Intu’s above-average LTV, it trades on broadly the same GAV discount as other UK REITs despite inferior total returns. The eye-catching FFO yield is also far less attractive on a cash basis. We reduce our TP by 21% to reflect cuts to our LfL rental growth assumptions. »

Nice job for not recommending the stock, be spot on the name of the most likely acquirer of the company but not believing an underperformer could be a good candidate for M&A.