Home Reit Share Discussion Threads

[market sniper3] 28/1/2016 12:54

200p and no less, the bears are getting desperate.

[jonny33] 28/1/2016 12:15

This looks like the cause of the wobble just now

FT Alphaville today


BE

Anyway, HOME a bit weak this morning.
PM

hxxp://www.theguar...eam-football-story
BE

Some talk around among the short sellers this morning, which as absolutely not been backtested, to be clear.
BE

The idea being that Sainsbury will bid again, but it's likely to be an incremental bump rather than a knockout.
BE

And HOME would struggle to accept an incremental bump.
PM

hmm
Real time stream connected. New messages will appear here the moment they are published.
BE

Note the HOME short interest, though.
BE

PM

8% or so
BE

Yup, still nearly 9% of free float. There's a plenty to be made from spreading bear stories.
BE

Anyway, let me get Haitong
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Tony Shiret, who absolutely hates Argosbury.
PM

does he now
BE

Or Argbury. Perhaps that's better.
BE

Clearly the only things that can save Home Retail (HOME) as an independent company now would be pressure on Sainsbury (JS) (SBRY LN, 236p, Neutral, FV 235p) management not to proceed to make an offer, or a derisory low-field price. For Sainsbury CEO Mike Coupe either would represent a significant personal blow and we would expect management to be even more determined to continue despite the almost universally negative response to his proposed strategy. The HOME team’s surprise move to sell Homebase to Wesfarmers of Australia does raise the question of whether the subsequently de-levered Argos rump could be taken private, which we examine in this note.
However, our main finding having done this work is that divisional profits as shown by HOME may have been boosted for Argos by re-allocation of Financial Services EBIT and that this undermines the overall valuation. Our FV rises to 135p from 95p.

BE

We have tested the various elements of Buy-Out arithmetic here. Private Equity could generate significant returns if the Argos Transformation Plan is successfully delivered in private ownership. But this is based in part at least on the starting point of very low profitability, which both highlights the risks involved for PE and limits the leverage a private vehicle could support initially and hence the exit price for HOME shareholders. Any consideration of the exit value of Argos must also be based on assuming that the Argos business model – which we believe has become more dependent on the contribution of consumer finance – is sustainable in private ownership (see below).

As part of this exercise we have also had a much closer look at the composition of profits as stated by HOME. We believe that the Financial Services (HFS) business achieves far greater profits than stated and that these are re-allocated to Argos (mainly) and Homebase. We have estimated that over half of current year Argos EBIT is in fact re-allocated HFS profits, suggesting that the erosion of product based profitability has been greater than investors would generally believe. (We have received no co-operation from HOME in our analysis which incorporates a number of assumptions which may limit the accuracy of our conclusions.) The implication here is that Argos needs the support of a consumer finance structure to sustain its operations.

BE

Having performed the analysis we feel that there is a bit less to HOME than meets the eye. While HOME management may be motivated to offer for Argos, we believe that the valuations of Argos and HFS have to be considered together by investors rather than assuming a separate valuation for HFS based on its debtor book, because the returns implicit in a separate valuation of HFS would effectively be double-counted as its profits are mainly shown currently within the Argos EBIT.

We assume that Sainsbury has probably done the same work we have managed in a couple of days over the last six months. So we would expect that it does not want to double-count assets either. This said the logic of its approach eludes us so its valuation is likely to as well.

BE

Canaccord also advising caution into the deadline.
PM

Hang on
PM

We assume that Sainsbury has probably done the same work we have managed in a couple of days over the last six months.

PM

That's a bit cheeky no?
PM

But go on
PM

Canaccord
BE

Similar conclusion, slightly more tame argument.
BE

With the clock ticking down to the 5pm deadline on 2 February (or potentially later if agreed by the Takeover Panel), by when J Sainsbury has to decide whether or not to make an increased bid for Home Retail, the answer should soon become clearer as to whether Argos is to continue with its Digital Transformation plan as an independent operator or (potentially) as a subsidiary of J Sainsbury. Home Retail is currently just over three years through its five-year plan, so it is a case of unfinished business at this stage.

This will, of course, be dependent on a number of factors. First and foremost is whether Sainsbury does return with an enhanced bid. Assuming it does, we must see at what level this is pitched and whether shareholders are willing to accept this. In turn, this may depend on the mix of cash and paper offered. Given Sainsbury's own travails and challenges in its core grocery market, we would assume that the higher the mix of cash over paper, the higher the chances of success in securing Home Retail's shareholders' agreement.

BE

The market is not privy to the level at which Sainsbury's rebuffed offer last November was pitched (although press speculation centres at around 130p). There have been three key events since then - the proposed sale of Homebase to Wesfarmers for £340m (c 42p per share); a further profit warning from Home Retail; and market weakness and volatility. These will all play a part in Sainsbury's thinking for what it views as both a "strategically compelling transaction" but also "not a must do deal".

As the potential bidder, it is only Sainsbury's (and its shareholders') view on the strategic compulsion of the transaction that matters. We do not have adequate insight into Sainsbury's strategy to comment in an informed manner, but it is clear from some of its published materials that the company (and its advisors) are serious in their deliberations and justifications on this matter. This has certainly changed our initial scepticism on the probability of a higher, follow-up approach.

BE

As long-term observers of Home Retail, we remain less convinced of the strategic logic and rationale of such a deal. However, just as beauty is in the eye of the beholder, value is in the eye of the bidder. Our analysis of the value of "rump" Home Retail, excluding Homebase at a £340m value, shows that any bid for the total group above 135p values this rump at a premium to the wider sector, compared with the 13% discount Wesfarmers has proposed to pay for Homebase. Only a "strategically compelling transaction" could justify that in our view.

BE

In light of our 10% forecast cuts following Home's Q3 IMS and some sector de-rating, in the absence of a bid approach we would have cut our fundamental valuation to 100p (from 115p). Ascribing a two in three chance to a bid at the current share price and a one in three chance of no further - or failed - bids, in which case fundamentals would re-apply, this gives our new target price of 134p. We therefore retain our SELL recommendation.

BE

All of which plays into the bear stuff above rather neatly.
BE

There's a quite startling disconnect between what the buyside says HOME is worth -- remember the flush of "we won't sell for less than 200p!" articles a while back -- and the value the sellside sees in the business.
BE

One can be cynical about both sides, of course. Though only the former is talking its book.

11:38AM

[solanki2000] 28/1/2016 12:15

It can't keep rising daily. Some people will take profits, some will hold. There will be a counter bid, the question will be if its at a correct price or not to accept. You'd expect sainsbury to drop anyway as they are the bidders and market thinks they are overpaying when they are clearly not from analysis

[dealer1972] 28/1/2016 11:50

potential that QIA will not back a bid at the number the HOME board want?

[jonny33] 28/1/2016 11:48

Why is the share price tanking today? Edit Sainsbury's has just dropped as well, some news has been released somewhere.

[haywards26] 28/1/2016 11:44

I am very confident the improved bid will be here within days :)

[jonny33] 28/1/2016 11:24

I'm nervous that they may pull out of the deal if the Qatar Investment backers don't see the value for them. If only my crystal ball worked...

[solanki2000] 28/1/2016 11:06

Let's hope so

[market sniper3] 28/1/2016 10:55

Going for 200p now here.

[solanki2000] 28/1/2016 10:36

FCA are useless. They can't even regulate AIM where fraud takes place on a daily basis. It's all about fees along with the banks. In this case there is no conflict, issue or anything of the sort. Will all be fine as long as major shareholders approve any bid

[dins1249] 28/1/2016 10:30

Yes FCA - who I suppose are responsible for false market and insider trading.

[market sniper3] 28/1/2016 10:06

No regulators for PIs on the stock market, never as been.

And FCA just look after big business.

[solanki2000] 28/1/2016 10:04

No regulators mate, really not sure what you are talking about.

[market sniper3] 28/1/2016 09:57

What regulators??????????

[dins1249] 28/1/2016 09:47

Don't the regulators have anything at all to say in allowing a false market being created for so long. Though the deadline for Sainsbury's is 2 Feb, surely, either party should be forced to make a proper statement immediately. I guess regulators live in a different world.

[market sniper3] 28/1/2016 09:08

Time for a top up, the pull back keeps happening here and allowing new investors in and those adding.

After talks with a guru last night Im thinking 200p minimum.

[haywards26] 27/1/2016 20:21

They wont get Home for less than 170 imo. The price will likely be 180-190. I am very confident the bid will arrive. It makes total sense for Sainsbury's on multiple levels..

[market sniper3] 27/1/2016 18:54

Yep I cant see anything higher than 180p now.

Its ok working out the financials but its what the board are PREPARED to pay that counts and wether the selling party will accept it. Always a little leeway in the negotiating process.

[someuwin] 27/1/2016 18:48

RNS Number : 2303N

Sainsbury(J) PLC

27 January 2016

27 January 2016

Statement from J Sainsbury plc

Sainsbury's notes the articles recently published in the Times and the Guardian.

We understand that the QIA is not the source of these articles and has not yet taken a final position on the proposed Home Retail Group transaction. Like any other shareholder the QIA would consider any such proposal in detail before making a final decision on its position.

This statement is made in accordance with the Note on Rule 19.3 of the Takeover Code.

[solanki2000] 27/1/2016 18:13

Superb analysis and for the record I believe bang one. In a nutshell HOME has no debt, 200 million cash and 550m loan book. They getting a bargain at anything less than 210p however I feel HOME will sell out for sell. There strategy issit working thus far and the world is changing and everyone is struggling.This also doesn't factor in saving on net asset space as argos stores in sainsbury existing stores, delivery infrastructure and more footfall into sainsbury. Complete sense in this new world of shopping!

[dangersimpson2] 27/1/2016 17:07

25p is the return to shareholders. Of the proposed payment of £340m for homebase £75m will be eaten by seperation costs and is effectvely lost to the group. The rest adds value to the remaining group by strengthening the balance sheet and reducing the pension deficit. So this should be considered as £265m = 33p value to HOME not just the £200m = 25p proposed return. Homebase sale also reducing the lease liability.

When we add in the £550m = 69p net loan book which is essentially just a receivable then you get 102p.

The offer then depends on the valuation of the Argos trading business plus cash net of it's pension liabilities.

Cash is £193m

Pension deficit £100m (will be reduced by £50m but we have already counted that above.)

Provisions £191m - being conservative and assume none of these are transferred with Homebase.

= -£98m = -12p

Overall then 90p + Argos. (Shows what a good but this was sub £1.)

HOME trading (in a poor year) at c.£100m PBT. Homebase sale likley to reduce profit by c.£20m giving £80m PBT or £64m PAT = 8p.

In a good year I expect them to do at least twice that = 16p.

A 170p offer from SBRY would be paying a 10x net bad-year multiple or 5x good-year multiple.

A 210p offer would be a 15x net bad-year multiple or 7.5x good-year multiple.

So even a 210p offer would not be that crazy given that SBRY trade on a fwd multiple of 11, HOME consistently generates higher OCF than earnings, the deal could be debt funded to reduce tax and the potential synergies that have been detailed. Execution risk has reduced with the sale of homebase.

I'm not expecting taht SBRY will go as high as 210p (not without a counterbid anyway) but on balance of probablities it would seem worth them table a higher offer than the current share price.

[jonny33] 27/1/2016 16:31

Well, for fun we might as well speculate on the price, I'm going with £1.65 to £1.70

[imperial3] 27/1/2016 15:14

Does the price sill now include the value of Homebase.Is that worth 25p a share? Is that figure correct?

[jonny33] 27/1/2016 14:41

Remember the Homebase sale has to be agreed by shareholders, so they can't commit to any dates for returning money to shareholders until it's a guaranteed done deal

[spob] 27/1/2016 13:29

In other words, you are not gonna get paid twice over for Homebase