conjoined centro twins, page-2

I feel a RED day coming on.....


Commentary
7:40 AM, 26 Nov 2009 Robert Gottliebsen
Inside the Centro casino


When the Centro group hit serious trouble in 2008 I alerted Business Spectator readers that it would be a disaster if this company went into insolvency, given the value of its shopping centre management contracts and the impact of mass shopping centre sales on the commercial property market.

As it turned out, Centro was probably the only major corporation that was looking at bankruptcy and survived. These days Centro Properties shares are selling at around 30 cents and Centro Retail share are selling at about 16 cents.

Centro Retail stock represents a direct investment in shopping centres and its share price is roughly in line with analysts’ conclusions. Centro Properties is in a different league and I am mystified by what has happened.

The banks own about 15 per cent of the stock, which was acquired as part of the reconstruction. They are not sellers because the 15 per cent equity makes it difficult for a rogue group to take control. But the banks obtained their Centro Properties stock at a value of around 13 cents, or less than half the current market value.

A group of Chinese investors who have pooled their money to invest in international depressed assets own about 12 per cent of the stock and they appear to have paid even more than the current market, outlaying in the vicinity of $50 million.

The general view is that when the Chinese bought Centro Properties stock that they did not know that Centro Properties did not actually own shopping centres but rather owned interests in other group companies, which in turn owned the centres. Centro was the property manager. The Chinese were hopeful that they could arrange replacement finance for Centro Properties, but nothing eventuated.

All the local institutions have sold their Centro Properties stock and after the banks and the Chinese, the Centro Properties share register is now dominated by day traders.

The day traders are simply buying and selling the stock on a whim and treating Centro Properties like a casino trading counter. In terms of fundamentals the group has negative shareholder funds of $1.5 billion and had expected to generate about $200 million in cash flow over the next three years. But that target is unlikely to be met because of the tough times in the US, higher interest rates and the Australian dollar rise.

It is true that if there is a substantial rise in shopping centre values Centro Properties’ shareholders funds will move into the black. Alternatively it is also possible that banks might be prepared to take a haircut and accept a cash offer at a discount which would restore shareholders' funds. But it would require a 30 per cent discount on the $4.5 billion debt to go close to eliminating the shareholder's funds deficit.

While banks are taking a major haircut, it is possible someone could be found to deliver the cash. Interest is being paid in full on the debt so the banks would think twice.

A rise in shopping centre values and a bank haircut are on the long-term horizon, but at some point somebody is going to wake up to the fact that the odds of Centro Properties being worth 30 cents in the short and medium term are not good and what we are looking at is simply a gambling chip for the day traders to play with.