Intu SGS Structure - Bricks and mortar, Positioning

All,

Please find our updated analysis on INTU SGS here.

With UK Covid restrictions starting to ease, UK shoppers are starting to return to the High Street and Shopping Centres. Further, with foreign travel opportunities limited this year, and the significant “forced” savings in the UK economy, we expect a boost to UK retailers over the coming months.

Positioning: We are taking a 5% long position in the 4.625% 2030 Bonds at 70% in the SGS Finance Structure (formerly INTU SGS). At current prices, we are buying in at a 25% premium to Dec-2020 valuations (the equivalent value as % of Dec-17, Dec-18 and Dec-19 valuations are 64%, 58% and 48% discount), but the December valuation was from an extremely low rent collection levels and uncertain times. Although the argument can be made for an extremely bullish scenario, a modest recovery in rent collections, to c. 70% of 2018 levels would easily see 100% recovery on the face value of the bonds. Note: the equity of the structure will travel with the bonds, so recovery is not limited to par value.

Upside: We project property value to grow significantly over the coming years, driven by higher rent collection initially and the reduction in vacancies. This will inevitably be achieved involving rent renegotiations at discounts between 30% - 50% relative to FY2018. However, it will be the marginal contract negotiation that will drive property valuation. So while we see only limited cash interest for the intervening period, we are confident that the bonds will reflect a steep rise in valuation once the marginal rental contract closed is beginning to rise in value again.


Limited Downside: Downside is limited to the running yield. Even at current depressed levels, rent collection is above 50%. At 50%, 70% of the interest can be paid in cash which provides a base yield. The cash yield at 50% rental income is 4.6%, and we accept not sufficient for the risk of the position, it provides downside protection. The other major downside is CAPEX spend but there appears little appetite for any major works at any of the centres. Another buffer to downside is the fact that Lakeside is part of the SGS structure. Valuation of Lakeside alone would meet current market value of the bonds using 2019 valuations. The recent new tenants of Tommy Hilfiger and Harrods' Beauty Story, H Beauty points to the continued relevance of premium shopping centres to UK retailers.

Happy to discuss.

Tomás
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E: tmannion@sarria.co.uk
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