aegis equities finance viewopoint, page-5

One of my readers emailed me asking "What are my thoughts on Centro shares (CNP) which have a had big fall of late....and is it good value at $0.35c?". I had been reading about the plunge in Centro stock, an Australian property trust which invests in and manages retail properties, but not really paying much attention as I don't own its shares and the property management sector has not been one of the areas I have been following. However, armed with the question and after doing some research, here is what I found.

At 35 cents the shares could present a good, albeit very risky, buying opportunity. The low share price (the stock was trading close to $10 a year ago) and potential developments could present a good entry point now. However, I reiterate, this is a very risky investment and you could just as easily make significant losses. So read this article to get my views, but do your own homework as well.

First some background on Centro and how it got to this stage -

Yesterday Centro Properties Group announced a $1 billion-plus loss in the first half of this year, wiping $100 million of its already diminished market value and making it more difficult for the company to refinance its multibillion-dollar debt obligations. Its shares have tumbled more than 92 percent since December, valuing the company at A$380 million. Centro, which has funds under management of more than $26.6 billion, had made a profit of $157.276 million in the previous corresponding half. The turnaround in fortunes made Centro one of Australia's biggest casualties of the global credit crunch

Centro, which in addition to being second- biggest manager of retail property in Australia, is the fifth-largest shopping mall owner in the United States, controlling more than 800 shopping malls in all. It became heavily indebted after it made a series of aggressive and highly leveraged acquisitions in the U.S. market over the past two years. Its 674 U.S. properties account for 62% of its total portfolio by value under management. It owns 128 shopping centers in Australia and New Zealand.

The main reason for the loss was the impairments to its U.S. properties where the company had to write down $278 million worth of direct U.S. property investments and $578 million of its investment in the U.S.-based New Plan Excel Realty Trust. Centro failed to attract investors quickly enough to buy the New Plan properties off its books before the debt came due. In contrast, rental income grew by 10 per cent in a virtually fully occupied Australian portfolio. Australian sales were more than $10.5 billion, underpinned by improving supermarket and specialty sales growth, which together make up more that 70 per cent of Centro's total portfolio sales.

Centro is trying to refinance $3.9 billion of its own maturing short-term debt by April 30, but remains under pressure to raise fresh capital through asset sales or an equity injection. It has initiated a strategic review and opened up its data room for interested parties. There is speculation that Australian property company Mirvac Group, US-based private equity firm Blackstone Group, the Malaysia's Mulpha International and General Electric may bid for a controlling stake in Centro. Other bidders are also likely to bid for Centro as well as its various interests. Formal bids are expected within weeks

Centro Chief Executive Officer Glenn Rufrano said the company's operations and business model were sound. "The current issue facing the company is one of capitalization. Our review is focused on recapitalizing the Centro balance sheet." He is "convinced" the US portfolio will increase in value over time.

``It's a very daunting task given that the outlook for the U.S. economy is grim,'' said Winston Sammut, managing director of Maxim Asset Management Ltd. in Sydney. ``I'm leaning toward the plug not being pulled on Centro on the basis that the banks would prefer a solution to be found rather than them take total control.''

In Conclusion

The biggest risk with this stock is that there could be further write-downs or creditors may not extend the loan payback period which means the company could go into receivership or forced to sell its profitable Australian fund and assets, and you'll end up with almost nothing for your shares. However, if you are willing to take some risk, I think you could make some money in the short term - particularly if potential buyers inject cash into the company. I would only put in between $2000 - $3000 , which you could easily double (or lose) in a few months. Here's what I think the stock has going for in the near term which could lead to some significant share price appreciation:

1. It has a number of global and well-funded buyers interested in its assets, which means that external investors see value in the company. If one of these buyers take a stake in the company it will reassure a lot of people about the company's future and confidence it will be able to meet its upcoming debt obligations.

2. It's Australian and NZ (ANZ) operations are going well and are profitable. Write-downs are on the US side only. So if they get extra funding and manage their US exposure they should still be making decent profits on the ANZ operations. In time, if the US recovers, they should return to strong growth given the good quality of their asset base.

3. US retail sales are starting to show early signs of recovery and with further US interest rate cuts on the way, this could be a positive for the retail sector and for companies like Centro which manage and purchase various retail sites/shopping malls.

So there you have it - my view on the stock. In answer to my readers question - the stock is worth a punt for the risk-loving investor and could have significant upside.However if the credit markets get worse, especially in Australia, then all bets are off. I would also say take profits when/if the stock goes up by more than 50% - which it could easily do if the funding issues are resolved. Good luck!