For the first time we can see the grim reality of the Centro position. It is not a pleasant picture,
but there are some encouraging signs and Centro shareholders are likely to come out of the jungle with some value.
The underlying profit of the Centro business is $242 million. However, about $210 million of that comes from managing the Centro shopping centres.
The asset backing of Centro Properties is 69 cents. On the plus side, the shopping centre management contracts have not been given their full value in the balance sheet. But on the minus side, the company has tried hard to sell assets at around book value and found that sales are not easy to move at that level.
The simple facts are that valuers are valuing property on the high side, this high valuation covers not just Centro but a large number of companies. Another round of devaluations would wipe out most of the equity and leave the management contracts as the main asset.
I guess what Centro directors will be doing is trying to convince the banks to transfer $1 billion to $2 billion of their $6 billion-plus debt into equity and join in the long term upside of the Centro portfolio of shopping centres. Centro’s shopping centres are among the best in the world because they are insulated from economic downturns but will participate in the upturn. The latest Centro performance figures from the US are most encouraging. If the Centro corporate structure can be made sound, the group will return to attracting big chunks of superannuation money.
In theory the banks would want to tell the shareholders to go jump. But of course they can't, because although Centro's banks have the power to appoint a receiver, doing so would cause the management contracts to immediately self-destruct. The Centro management contracts yielded Centro Properties a massive $210 million – up 28 per cent on the previous year. It would have been even higher if the Australian dollar had been weaker and there is every likelihood that the management fees and the property income will grow in the current year.
If that is to be blown up by the banks, and the shopping centres are forced on the market because there is no one to manage them, then we are looking at one of Australia’s biggest collapses. Not only will it directly give our big banks big losses, but the indirect flow will create repercussions which would see bank profits badly mauled. For some banks, dividends would be put in jeopardy.
Of course overseas banks may not see it that way, but even the overseas banks must be somewhat intrigued that Centro is paying all its interest on time even while in this strife. The bottom line is that at the current price level the shareholders have only a token equity value, but they have more power to force the banks to agree than any shareholders of a failed company in Australia’s history. But should they go too far the situation will explode because banks have to provide equity for any loans they convert to shares. So it’s a deadly game of bluff.
However, doing nothing is equally dangerous because good management staff will leave and the shopping centres will deteriorate. If I was recapitalising the company, I would offer well capitalised properties to syndicate holders (I am one) because if properly structured they are an ideal investment in the current climate.
It is a tragedy that Centro was not recapitalised before equity markets dried up.
CNP Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
