Billionaire hedge fund manager Crispin Odey declared last week that the UK’s leading stock index, the FTSE 100, could lose as much as 80% of its value over the next few years, as the country works its way through Brexit.
Rather than betting against the FTSE 100 as a whole, Odey has picked some individual stocks to short, on order to play the FTSE 100’s declines. ITV (LSE: ITV), Intu Properties (LSE: INTU) are two specific bets, although Odey believes each will suffer for different reasons.
Specifically, he believes that ITV’s revenue and income will come under pressure, as advertisers pull back on spending following the referendum and possible decline in consumer spending. Declining consumer spending will also weigh on Intu, the owner of some of the largest and most popular shopping centres in the UK and Spain.
The big question is, how likely is it that these companies will see the value of their shares fall by as much as 80% as the Brexit negotiations get underway?
It’s hard to answer this question. Trying to predict where any share will be two years from now is almost impossible. That said, looking at these two companies and their robust fundamentals today, I would be extremely surprised if their market valuations collapsed before the end of the decade.
Solid balance sheet
Intu has a strong balance sheet full of freeholds of the shopping centres it owns and manages. At the end of September, the company had cash and available short-term credit of £534m while the group’s debt to asset ratio came in at 44.5%.
What’s more, even though analysts have been predicting the death of brick and mortar retailers for the past decade, at the end of September Intu recorded a 95.6% occupancy rate, up 0.1% year-on-year. Furthermore, 67 new long-term leases were signed during the quarter to the end of October with an average rent uplift of 4% compared to the same period a year ago.
For the full year, the company is expecting net revenue growth of 3% to 4% and management expects a similar level of growth for 2017. City analysts have pencilled in earnings per share growth of 2% for 2016 and 3% for 2017. The shares currently support a dividend yield of 5%.
All in all, Intu’s strong balance sheet and continuing demand from customers shows that the company won’t go under anytime soon.
Revenues underpressure
Odey’s bet against ITV could have something to do with concerns about falling advertising income for the company along with increasing competition from the likes of Netflix and Sky.
These are not new concerns. The City has expressed worries about falling advertising revenue and increasing competition for some time, but ITV has continued to chalk up growth. That said, some cracks are starting to appear in ITV’s facade. City analysts are predicting that earnings will remain flat this year and last week the group announced plans to cut jobs due to economic uncertainty.
However, shares in ITV currently trade at a forward P/E of 10.4, compared to a five-year average of 14, which implies that the bad news is already priced into the stock. As ITV’s earnings are not set to collapse, and the bad news already factored into the stock, I think it’s unlikely the shares could fall another 80%.
