Debentures Plc (INTU) : Stability, then growth

All,

Please find our analysis on Debenture Plc (formerly INTU Debenture Plc) here.

Given the recent news on occupancy rates and potential new tenants, can we infer the revised 3yr Business Plan is a pessimistic outlook that is not in keeping with their peers business plans nor could it be used to justify the Dec’20 valuation statement?

Debenture Plc is a financing vehicle for three UK regional shopping centres, namely Eldon Square in Newcastle, Potteries in Stoke-on-Trent and Xsite at Braehead, a leisure centre in Glasgow. At current levels, investors are buying into the structure at a discount to Dec-20 valuations. We expect these valuations to come down at the next valuation cycle, but even allowing for this, we see upside as the centres stabilises and yields contract.

Recent news

- H&M are moving their store in Newcastle away from a traditional high street into Eldon Square shopping centre. Obviously there is no mention of price, but notwithstanding, this is positive for Eldon Square and shopping centres in general. It is a vote of confidence from a major European fashion chain that shopping centres remain central to UK retail offering.

Johnson Shopping Centre, Sligo, Ireland

- The recent announcement of the sale of a provincial shopping centre in Ireland has given significantly more information than made available on UK properties. Although significantly smaller than any of the Debenture shopping centres, if the guide price is realistic it provides a floor yield price for shopping centres. The Johnson Shopping Centre, in Sligo, Ireland is marketed at 10.7% Initial Yield, after relevant purchasers costs. Valuing Debenture Plc on a similar basis would equate to £148m of value or 50% bond price, 16% upside from current levels.

Positioning

- We are comfortable that there is limited downside from current levels of low 40’s, but we are not taking a long position in Debenture Plc bonds currently.

- Firstly, for similar risks, we are more comfortable in taking a long position in SGS, given its higher quality of assets and the restructuring processed further. We acknowledge that investors are buying into SGS at a premium to last valuation statement, while Debenture offers the opportunity to invest at a discount.

- Taking the 3yr plan as gospel, investors should expect a downward revision to asset valuations when the Dec-21 report is released. However, the business plan does not tally with the valuation statement of Dec-20, and we are not aware of such material underperformance at the underlying sites. With this in mind, we are seeking further clarity on the underlying assumptions that the Company has used to create, what we view, the pessimistic 3yr Business Plan.

- It should be noted an investment in either SGS or Debenture is based on the vacancy rates declining over the coming quarters, stabilising the rent collection, and with this achieved, a compression of yields from current levels to drive valuations higher. However, the real upside will come from increased rental income beyond FY23, which could lead to investors doubling their money.

Happy to discuss.

Tomás

E: tmannion@sarria.co.uk

T: +44 20 3744 7009

M:+44 7786 705 806

www.sarria.co.uk