Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
sain: please read carefully ... and remember. As long as Intu net rental income is more than sevicing cost of debt (or at least more than interest on debt) ... I would not worry. Intu can reduce the debt with time (if they want to).
Here are figures until end 2018 (given in May 2019).
Net debt: £4867 million.
(This may already have gone down, as Intu claims money received from sale of Derby interest would he used to reduce debt. Plus, dividend not paid also used to reduce debt.
Market value of investment: £9167 million.
(Intu furhter invested on assets. So, asset value might have gone up. This might have decreased due to property slum. I still do not think assets could have decreased to £ 5000 mn or £6000 mn. Even if it reduces to less than debt (l£4800 mn), I do not think one should worry. No lender would start calling debt, unless they think that income generated could not pay interest without better prospect).
Present time is good time to borrow at low interest rate and lock it. (If company look for, loan at even below 2 % is available).
Debt to asset ratio: 4867 divided by 9167 = 53.1
As intu mentioned, only needs ~ £123 million to fulfil debt covenant if asset value decreases to 71%. Intu can pay that amount from cash in hand.
Average interest on debt is 4.2% … that is reducing every year (as some high interest debt is going to mature soon). So, interest on debt comes to ~ £204 million (that would reduce even if debt is not reduced).
This interest for Intu is likely to reduce soon and if Intu manages the business well, it may have already gone down substantially.
Present financing cost (including interest) on Intu debt is ~£220 million (that may include some debt amortization)
Financing cost of debt in December 2018 was ~£220 million. After reducing debt and borrowing at lower interest rate to pay debt with higher interest rate, this cost must have gone down, could be even less than £190 million.
With rental income of around £450 mn, this should be no problem even if rental income halves.
Intu yearly rental income is ~£450 million (in 2017. it was ~£260 million).
After all cost. intu earned ~£193 million for shareholders (got reduced from £201 million in 2017) ... I doubt if it has gone down much below this.
Intu has cash and available facility of ~ £ 548 million (I believe, a large portion of it is in cash, that includes dividend not paid, last year cash reserve, and recent rental income). So, Intu have plenty of cash and facilities to cover adverse situations.
Now, when they can easily cover interest on their debt (their net profit is ~ twice the interest on their debt), plus from profit, Intu could reduce debt by few hundred million pounds every year (not paying any dividend), than what is the problem, what to worry? - And why Intu should look for buyer or sell buyer at discount price?
I do not think there is any reason or emergency that Intu should sell cheap.
Gewillia: As far as I know (let me know, if I am wrong):
Intu:
Net debt: £4867 million.
Market value of investment: £9167 million.
Debt to asset ratio: 4867 divided by 9167 = 53.1
Average interest on debt is 4.2 percent … that is reducing every year (as some high interest debt is going to mature soon). So, interest on debt comes to ~ £204 million (that would reduce even if debt is not reduced).
Present financing cost (including interest) on Intu debt is ~£220 million (that may include some debt amortization)
Intu yearly rental income is ~£450 million (in 2017. it was ~£260 million).
After all cost. intu earned ~£193 million for shareholders (got reduced from £201 million in 2017)
Intu has cash and available facility of ~ £ 548 million (I believe, a large portion of it is in cash, that includes dividend not paid, last year cash reserve, and recent rental income).
Now, when they can easily cover interest on their debt (their net profit is ~ twice the interest on their debt), plus, Intu could make few hundred million pounds extra to reduce their debt, than what is the problem … and why Intu should look for buyer?
I do not know why people want to see Intu getting sold and that all cheaply? ... One should be confident of company future and look at things optimistically and logically. If going along with result Intu declared on 20 Feb, here is LTV covenant situation:
If asset value goes down 25 percent (very unlikely) from valuation at 31 Dec 2018, then breach would be of £123 million ... and that would imply debt to asset ratio of 71 percent. That would also mean total asset getting reduced to £6855 million.
Good thing is that, even if that happens, company net asset (asset - debt) would be around £2 billion (or ~ double the share capitalisation value).
So, I do not understand why worry. Just face the anomalies of share market and sleep (carefree). It is not that UK economy is soon going to be same as economy of Ethiopia, neither UK property would become as valueless as Sahara Desert. Share market is such that it has pulled many shares to rock bottom value and then, when things got clear, shares rebounded back. Sooner or later, sense do prevail.
SP do not depend on Logic. It depends on sentiment, perception, emotion and ignorance. But in the end, when truth sink in, logical conclusion would determine if the company is good or bad. For instance: Few months ago, Intu was over £2 a share ... today it is £1. Does it mean, Intu assets halved, or their profit plummeted?
NO ... it means, Market sentiment, perception, emotion and ignorance has over taken the reality. When truth would sink into the market, SP would find its true value.
It does not mean that true value of Intu is higher or lower, it means that at present, SP is not reflecting true value of the company, but when it would be, all variables of the company would play a role (that could be more favourable to into then today or could be more adverse).
[Some may differ, but looking at their book, what I can conclude that in present environment, Intu SP true value is somewhere around £2.30 … but if things improve a bit, SP could even be good at £3.00]
zccax77: Do not worry, sentiment in stock market makes many bankrupt and many rich. :).
As I mentioned earlier, intu only need to seel around £350 million assets and use some of the cash to bring the debt below 50 percent. They have already sold £186 million asset. Another £170 million sell would be enough to bring the debt within target (all on basis of December 2018 assets value). But then, we do not know what would be next valuation of assets.
Anyhow, ur belief is right that after Derby deal concluded, SP would have increased, but it has not. Shows, what stock market sentiment does, right? :)
xccax77: This is how maths would work if intu sell £350 worth asset and use that plus cash they have to reduce debt:
Total assets ~ £9.2 bn (Assets plus cash)
Total debt ~ £ 4.8 bn
Cash = £ 274 mn
Sell assets worth £350 million
Pay debt £350 mn + £250 mn = £600 million
Total asset left £ 9.2 bn - £ 600 mn = £ 8.6 bn
Total debt = £4.8 bn - £600 mn = £ 4.2 bn
So, total debt to asset ratio would be ~ 49 %
Note: If intu do not sell anything but do not pay dividend next year and use it to repay debt, than again, situation would be much better than even 49% debt (only if there is no further devaluation of intu assets).
xccax77: I think, u r looking at debt as big, big problem, but I do not think company is looking it that way. Now, coming to ur concern according to what I understand and believe:
Spanish investment is ~ £700 million giving income ~ £34 mn (investment is in developing stage, and it is expected that return would stabilise at over 7% ... or after all investment is complete and rent stabilises than investment would be worth ~ £900 million and return would be ~ £730 mn @ 7% return). Reality is that, intu is further investing in Spain (maybe around £200 million), that means intu Spanish investment is around £900 million. Good thing is that, Spanish investment is going up as well as income from it. You have to compare into income that with intu debt cost.
Intu debt is of three types.
1: Debt (in general) = £3.8 bn @ 3.5 % interest. (so, any investment that gives return over 3.5 percent is good).
2: Debt on intu traford centre = £0.7 bn @ 6 % interest (expensive).
3: Debenture stock= £ 0.2 bn @ 9.9 % interest (very very expensive, but it would end by 2027).
From here, you can see that average interest on debt is @ 4.2 % ... but most of the debt is @3.5 %
With return on entire asset @ 5 % (or ~ £457 mn on asset ~ £9.2 bn), borrowing is paying. Debt servicing is around £220 mn and administrative costs around £44 million ... total = £264 million that leaves (£457 mn - £264 mn =) £193 mn profit (that is, ~ 15 pence per share at present SP). We have to remember that whenever intu would sell an asset, their income as well as profit would reduce too.
Now, why intu is good investment? ... Because, according to British tax law, intu should pay 90 percent of profit to shareholders, else they would have to give tax on that profit. It means, once intu bring debt in control, by selling or by whatever means, intu would start paying 90 % profit as dividend to shareholders. Intu can do that today too, paying 15 percent dividend on present share price, but just to keep the company on safe side, they want debt to get reduced to below 50 percent of their asset holdings.
They can do that by selling some of their assets to reduce debt. They already have £274 million cash. Thus, they have to sell ~£350 million worth of assets and intu would reduce their debt to 50 percent of total assets (if assets do not get devalued further). So, be patient and hope economy would stabilise and retail properties do not go down further.
Sain@vision: 'They are carrying an unhealthy amount of debt in a market where the values of super prime shoping centres are in unchartered waters Retail investment market is on its head They will be experiencing intense pressure to reduce'
No doubt, debt is high, but debt is good if company can service the debt: Successful companies borrow to increase productivity and profit. Debt is burden too and can cause bankruptcy, but that happens if company cannot service the debt. Intu profit is almost twice what they pay as interest, so that should not be problem other than sentiment.
'Hopefully there will be a"special purchaser" prepared to discount the background noise to purchase 1or more centres'
Why intu needs special purchaser? ... It is true that Intu might look for company that can boost intu stability. For instance, if Intu profits start going down (or interest rate start going up) than a company with stronger finance would be helpful. Intu do not need on in urgency (as they are fine for next 5 yrs), but company cannot say what would be the situation after that.
'Current valuation ofthe portfolio reflects an overall yield of 4.93% At low yields valuesare highly sensitive At 6% this would show a reduction of 3.5 x the rental income another 15% off capital value Unfortuanately that is not totally out of the question'
I believe, net initial yield is 4.98 percent (but that is obviously going to rise if property value goes down, as their profit with respect to property values would increase) ... on the other hand, average cost of debt is 4.2 percent (that is expected to go down as interest on some debt maturing next year is quite high). Regardless, this cost is on debt, while yield is on entire assets (almost twice net debt). In other words, unless profit (rent income) starts going down rapidly, cost of debt would be covered.
In simple words and figures:
Debt = £4.8 bn ... financing cost on the borrowing: £220 million
Income: £457 million
Administrative cost: £44 million
Debt financing: £220 million
Profit that can be used to pay dividend or reduce debt prematurely: £193 million
Cash in hand: £274 million
Undrawn cash facilities available: £274 million
Together: £548 bn (immediate cash company can rely in emergency).
So, I do not see any problem other than sentiment and excessive fear of future British economy.
SAIN@VISION: I think, you misunderstood me. I did not mean to say that valuation does not matter. What I am saying is that, they have enough profit to pay interest on their debt. Important figures are:
Profit/income: £457 million
Admin expenses: £44 million
Interest on debt (£4.87 bn): £220 mn
Profit after all expenses: £193 million (THIS IS THE MOST IMPORTANT FIGURE)
As long as they can service their debt, they should not worry. Their asset valuation is going down, still total assets is £9.16 billion. ... leaving them with net asset of around £4.3 bn (well above company’s market capitalisation).
Regardless, even if their assets value goes down, it should not matter as long as they are making enough to cover debt servicing cost. If lenders want to, they might take the company to receiver if total assets would get reduced to less than total debt (that would be half the asset value they have today), but it would not happen due to company not able to service debt of the lenders. I do not think, this would happen, but then I do not think that lightening would fall at my house tonight, but it could, right? ??
That is why I wrote that to ignore valuation but see the fundamentals, that is, Intu ability to service their debt or not, and I think they could for foreseeable future.
Aby1972: Yea, intu have cash and available facilities of £548 million. I do not know, how much of it is cash, but regardless, they have access to this amount anytime.
Actually, going through their result again, it seems they have no problem in near future and most likely, would go through the environment nicely. If one ignores valuation loss, they are making healthy profit of £193 million (£0.14 per share) after paying interest on their debt and taxes. Thus, it is unlikely they would not be able to keep up with interest payment.
Overall, I do not think this company is in troubled water, but one cannot fight with sentiments. Whatever battering share is getting, it is due to market sentiments and only Stupid surrender against such sentiments. I am sure, with time, Intu would be rewarding.
Aby1972 - Where you got the imformation: 'with all the doom and gloom net asset value £2.71 they have cash £500mi still find it hard to believe the current share price'
Imtu have £500 mi cash? ... because if they had, they would have paid to reduce the debt (but I migth be wrong, so asking).
Nuri123a: (Even if the dividend was cut to 0% - these are still well undervalued.)
What made you think that there is even a chance of dividend cut? ... Is there a reason?
Dividend do not go down just because share price has gone down (or increases if SP has increased). Dividend goes down if profit goes down, there is shortage of cash, or company valuation goes down and there are huge debts to pay. ... RMG do not face any of them.
RMG debt is low (~£600 million). Cash is high (~£600 million ... almost equal to debt). Dividend cost would be around £240 million. Profit is more than £300 million.
No company reduce dividend to expand or acquire another business, do they? ... RMG in Sept 2018 (~7 months ago), bought Canadian parcel servicing company 'Dicom' for £213 million. Do you think, RMG would have invested in buying companies if they were feeling cash pinch or intending to cut dividend?
So think if you can find a reason: Why RMG is going to cut dividend?
Beatrootjuice: Who told you that there would be no letter in future? ... Actually, whatever reduction there would be in the use of letter, most of it has already happened. Almost all in UK have internet and rarely anyone uses letter where they do not need to. Hence, whatever letter usage is there, most of it is going to stay in future too.
On the other hand, as internet buying is increasing, parcel service would increase over time. RMG is investing heavily in parcel/packets distribution network, not only in UK, but also in USA, Canada, Europe and Asia.
RMG is also getting into property business, mostrly related to developing huge access properties they have.
In 2018, RMG had £600 million cash (that is likely to increase this year).
With net assets ~ £4.5 bn and a secure business, RMG share price could be worth over £5 easily, could even be worth £10 in few years time.
RMG has net yearly income ~£260 million (that I think is unlikely to reduce, rather, it would keep increasing over time) and they are paying £240 million as dividend (again, I think it is unlikely to reduce, rather, it would keep increasing over time (it has increased every year till now).
So, with 10 pecent plus dividend (on present share price), and no chance of bankruptcy - what one can lose?
We should know that RMG has announded 3 pence price rise for 1st and 2nd class stamps to 70 p and 61 p. But they wanted to, they could have increased the price for 2nd class to 65 pence (Ofcoms limits) instead of 61 pence (from 1st April 2019) and then increase the price every year equal to CPI (inflation).We should also know that on average, 1st class post in Europe is 99 pence, and 2nd class post is 77p.So, we can be certain that RMG profit would keep rising with time, more than inflation. So, sleep nicely over RMG share investment (especially if you bought the share at below £5) and do not worry about share price.
Just imagine ... RMG has increased postage rate by ~5 percent. With RMG transformation of business, productivity and efficiency would both improve. Profit from RMG foreign businesses (GLS) would also increase.
I believe, RMG profit next year (2020) could be more than £650 million and with transformation cost decreasing, profit minus transformation cost could be over £400 million. Dividend could be 27 pence (~£ 270 million distribution), and cash per share might increase to 80 pence (from present 60 pence). So, buying RMG at below 250 pence (even 500 pence) is investing without near to zero risk.
It does not matter if Labour win the election. RMG would always going to have reasonable profit. At present, RMG profit is ~ £550 million and they only need £240 to pay and continue to pay present 24 pence dividend (most likely, their dividend payment would increase over time).
Actually, RMG is spending a lot on transformation of company. They are also expanding outside UK, especially in parcel distribution market. Thus, chances is that their profit would increase substantially in near future, over present £550 million, and it means, their dividend would also increase.
So, whatever the share price in future, for all who buy today, they can be sure to get 10 percent plus dividend on their present investment, that would rise with time. Sometime market behaves insanely with some shares, but eventually adjust to reality.
Redceo: You are welcome. Actually; many do not realise that RMG has a monopoly over letter distribution in UK, with returns and responsibilities that no other company has. Just imagine, RMG stop working, then there would be no national company responsible of letter distribution and state cannot have such situation. No company in UK would take responsibility of delivering letter to any corner of UK for less than £1 (and sometime that is loss making exercise). But with monopoly over letter distribution, RMG could never fail. On the other hand, even though RMG has no monopoly over parcel distribution, but if RMG decides (and government allows), they could also monopolise parcel distribution in UK.
I think, with such powerful company with monopoly on letter delivery network (that could also monopolise parcel delivery network), only idiots would lose hope on the company.
RMG has £600 million cash (60p per share) and £500 million plus profit (£260 million after transformation cost) ... so, there is no danger to dividend (~£250 million) that comes to over 10 percent dividend return for those buy/bought the share at below 250 pence. RMG is only company in UK that has ability to deliver letters and parcels all over UK and increasing its footprint in parcel market.
As for future, RMG has over £1 billion in excess properties all over UK, that RMG intend to sell or develop to sell. RMG has bought business assets all over the world under name General Logistics Systems (GLS). Recently bought Canadian DICOM parcel delivery company for C$ 360 million (~ £200 million) adding RMG parcel delivery investment in USA and Europe. RMG has also acquired F&S Property Management and there are other RMG business interests too, in and out of UK. GLS contribution to RMG profit is increasing every year.
So, with all these assets and business interest, I do not think there is any chance that RMG would disappoint its shareholders (especially those who have patient). In my opinion, RMG share price should be over 600 pence today and could rise well over £10 over time. But in between, we all know, there would be ups and downs (sometime, the swing could be big). ... So, for those who bought the share, they should sleep on it without worry.
Dale: 'divi wont be 10% when it gets cut or passed in aug.'
You are right. Div wont be 10% in august, not because of dividend cut, but because share price would be higher. If SP increases to £ 5 ... than even if dividend stays the same, it would be 5%.
Beatroodjuice: It is not that 'more letters' are more profitable than 'more packets’. It is about what services are in demand and would increase in future. With time, letter traffic would decrease (though, it is possible that we are seeing the reduction as rock bottom, but increase is unlikely).
As far as parcels are concerned, it is not cost that is important, it is cost with respect to competition. Parcel traffic is increasing, and it may keep increasing with time. For survival, RMG has to make it competitive and work in reducing the cost. What I believe, RMG would succeed in doing that, and that is where they are spending to transform.