intu properties plc (LSE:INTU) has been on my radar for a while, and I’ve been consistently disappointed in its investment thesis. My concerns are mainly around the sustainability of its future growth, the opportunity cost of investing in the stock accounting for the returns I could have gotten in other peers, and its cash-to-debt management. Whether a company has a good future, in terms of its business operation and financial health, is an important question to address.
intu owns and manages some of the best shopping centres, in some of the strongest locations, in the UK and Spain. Since starting in 1980 in United Kingdom, the company has now grown to a market cap of UK£2.78B.
The first thing that struck me was the pessimistic outlook for INTU. A consensus of 6 GB equity real estate investment trusts (reits) analysts covering the stock indicates that its revenue level is expected to decline by -11.25% by 2021, negatively impacting earnings, with a bottom-line annual growth rate of -65.22%, on average, over the same time period. Moreover, at its current level of earnings generated, INTU produces worse returns to shareholders (3.96%) compared to its industry peers (9.13%), which isn’t a good sign. One reason I’d expect a company to produce below-industry returns right now is if it’s in a reinvestment phase, and gains will become evident in the future. However, for INTU this clearly isn’t the case, and leads to a big question mark around the sustainability of its current operations.
Limiting your downside risk is an important part of investing, and financial health is a key determinant on whether INTU is a risky investment or not. Two major red flags for INTU are its debt level exceeds equity on its balance sheet, and its cash from its core activities is only enough to cover a mere 2.64% of this large debt amount. Furthermore, its EBIT was not able to sufficiently cover its interest payment, with a cover of 2.23x. This induces further concerns around the sustainability of the business going forward. INTU has poor liquidity management. Firstly, its cash and other liquid assets are not sufficient to meet its upcoming liabilities within the year, let alone its longer term liabilities. Secondly, more than a fifth of its total assets are physical and illiquid, such as inventory. Keeping in mind the downside risk, if we think about the worst case scenario, such as a downturn or bankruptcy, a non-trivial portion of its assets will be hard to liquidate and redistribute back to investors.
INTU is now trading at UK£2.07 per share. At 1.34 billion shares, that’s a UK£2.78B market cap – which is too high for a company that has a 5-year cumulative average growth rate (CAGR) of 3.64% (source: analyst consensus). With an upcoming 2018 free cash flow figure of UK£204.00M, the target price for INTU is UK£1.47. This indicates that the stock is currently priced at a large premium. But, comparing INTU’s current share price to its peers based on its industry and earnings level, it’s trading at a fair value, with a PE ratio of 12.81x vs. the industry average of 10.03x.
INTU is a fast-fail research for me. Good companies should have good financials to match, which isn’t the case here. Given investors have limited time to analyze a universe of stocks, INTU doesn’t make the cut for a deeper dive. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.