The major issue for CER is of course the SuperLLC JV with CNP and this is the important debt that needs refinancing. As you say, the CER portion is ringfenced and the maximum that CER can lose (from memory) is a further 28c NTA. It has already provided for ~$300m of this and I suspect we will see further provisions in the upcoming half. CNP on the other hand is liable for most, if not all, of the remainder via the $1.3bn guarantee it has given to the SuperLLC lending group. If SuperLLC falls over, the lenders can reach out to the entire CNP balance sheet (essentially wiping the company out), but can only take about 28c NTA from CER.
I am firmly, firmly of the opinion that the long-term fate of CER is decoupled from that of CNP. This was confirmed, in part at least, on the YE conference call when Andrew Rosaviach from Credit Suisse posed the question as to what might happen to CER if CNP falls over. We all heard the response from GR, which was essentially that CER would find a new RE.
The fact that CNP is a majority shareholder of CER does not absolve the board of its responsibility to all shareholders and to the rules associated with a listed entity. To your point though (with which I agree), at a day-to-day level there is no escaping the fact that CER does what CNP wants it to, but that is also due to the fact that CNP is the RE and CER has no staff as such.
I don't believe CNP should sell the stake in CER unless it made business sense to do so, which in the current environment it obviously does not and probably never will.
This is essentially the conundrum. If CER was a stand-alone entity, with no association to Centro, and no controlling shareholder, trading at 8c it would be taken over instantly. Either a private equity firm, Simon Properties, Kimco, or the like would walk in and snap it up. To be fair, the litigation adds a level to this but you get the picture.
We worked out that the 227m-odd shares purchase by Orbis post sub holder notification were bought for $77m which gives an average cost of 26.45c. We cannot tell how much they paid for their original 5% sub holding, but estimate this make take the average cost to between 30 and 35c. This is dropping every second as they pick up more and more on market at 8c. As I said on Monday, 1 in every 4 shares you see traded on CER is Deutsche Bank buying for Orbis.
Orbis, like us, are essentially making a margin-of-safety play independent of the CNP outcome. At YE, CER had $1.27 NTA with 28c at risk through SuperLLC. So the two scenarios are:
1. If CNP falls over, CER is in play and will then start to be valued at a discount to NTA. Even if the whole company is then valued at 60% discount to NTA, Orbis will make about $70m profit or close to 100% return, plus any distributions along the way.
2. If CNP makes it (which is the best outcome for everyone), CER will over time be valued on a DCF, PER or other value metric. Even in the current distressed state, CER reported 13.25c distributable income (which is not an Australian accounting term) and paid a 1.4c distribution. When the world starts to realise life ain't that bad, you could see CER returning to 20, 50 and then 100c. You can do the maths on how much Orbis will make, plus any distributions along the way.
The global environment, Centroitis, lack of capital, litigation, the ever-decreasing SP and a host of other factors are making the water muddy but in time this will clear. Orbis have a 3-5 year horizon on an investment and for those of us who have the staying power, CER will probably pay off. There's no escaping the risk involved though.
As an aside, CER paid a 1.4c distribution last half. Our estimates are for somewhere between 1 and 1.5c in the coming half, all being well, and maybe the same at year end. Orbis made around $2.7m last half from the distribution alone and (with their now significantly increased holding) will make about $3.5m - $4m this half and the same at year end.
CNP Price at posting:
5.1¢ Sentiment: Buy Disclosure: Held
