Berenberg starts Intu, Capital & Regional at 'buy'

Berenberg initiated coverage of Intu Properties and Capital & Reginal at 'buy' as it highlighted three key reasons why it sees value in the UK shopping centre market.

The bank said that despite innovation to date, online retailing cannot fully replicate the physical retail experience. "Not every retail offer is suited to ecommerce while the costs associated with satisfying consumer expectations are increasing exponentially. As a result, physical stores with the right product mix in the right locations are likely to remain the primary point of sale," it said.

Berenberg also noted that share prices represent a material disconnect to asset fundamentals, implying a capital value fall of 10%-35%, or more than 211 basis points of outward yield movement, 89% of that experienced in the financial crisis.

"This scenario is highly unlikely, in our view. REIT balance sheets remain robust, asset quality has been improved and operational efficiency gains have been made," it said.

Finally, it said that a material shopping centre valuation correction is unlikely for all but the most under-invested, poorly located assets.

As far as Intu is concerned, Berenberg said it is well insulated from the current retail headwinds, with high, consistent occupancy levels. In addition, while its loan-to-value is high, the company's balance sheet is resilient and a clear path to earnings growth remains.

The bank also argued that Intu's high-quality portfolio is under-appreciated.

"Intu owns a portfolio of large regional destinations that are dominant in their catchments, well maintained, growing and fit for modern retailing. These centres generate stable, long-dated, growing income with significant opportunity for net asset value and earnings-enhancing development. Despite structural threats Intu’s assets have out-performed the market and peers, growing footfall, rents and occupancy. We expect this to continue despite cyclical risks."

On Capital & Regional, Berenberg said there is significant value in residential developments.

"We see potential for material land value revaluations on planning milestones and land disposals, generating proceeds significantly above book value, benefitting NAV and lowering LTV," it said.

In addition, Berenberg pointed out that the company is set to benefit from its 85% exposure to London and the South East.

"London shopping centres have materially outperformed the regional centres over the long term, driven in part by higher population growth, above-average income levels, weighting of infrastructure investment and the back-stop to asset valuations provided by alternative use values. We expect this trend to continue."

The bank has a 60p price target on Capital & Regional and 230p price target on Intu.

At 1230 BST, Intu shares were up 0.8% to 162.30p and Capital & Regional was 0.3% higher at 46.20p.