Friday, March 17, 2006

Stock takes: The bull is out of the paddock

By Liam Dann

What a difference a fortnight can make. Suddenly, after a rocky start to the year, we seem to be in the midst of a mini-bull run. Ok, so things have pulled back a little since Tuesday's NZSX-50 record high, but it still seems a stack of companies are benefiting from the renewed market vigour - presumably on the back of the falling dollar. Vector, The Warehouse, Telecom, Tenon, GPG, FPH and FPA, Waste Management, Skellerup, Infratil, Steel and Tube, Cavalier and Fletcher Building have all had plenty of buyers for the past week or so. The rise of of the export stocks is no surprise. As for the others, it seems that many investors are now prepared to look through the domestic doom to grab a bargain.

Change of tack

Anyway, enough of the positivity (there is only so much good cheer we can handle here in the media before we need a need a cup of tea and and a lie-down). Telecom shares may be enjoying a bit of a run for now but analysts still see serious clouds on the horizon - and not all are regulatory.

Macquarie Equities - which last month had a rosy outlook - has had a rethink and dropped its target price significantly. In February, the Macquarie team went in to bat for Telecom, arguing that the media campaign about broadband performance was "either factually incorrect or misleading". At the time, it gave the shares a valuation of $6.80 and a 12-month target price of $6.40.

A month later, that valuation has been dropped to $5.95 and the 12-month target to $5.80. The rethink is largely down to an acceptance that the Government is hell-bent on unbundling the local loop (ULL). Macquarie analysts estimate the ULL cost to Telecom will be about 83c a share. Of that, 51c relates to the loss of access revenues paid by competitors for the right to use the lines. The rest relates to the "much harder to guess" second round impact on calling prices.

Despite evidence of some good domestic earnings growth in its last result, Goldman Sachs JBWere also remains pretty negative. It is picking that soft margins in the mobile business, a "seachange" in the regulatory environment, continued erosion of its fixed-line business and ongoing costs related to the exit from Australia give it a valuation of just $5.39 - below its present price of $5.52.

New research team

After several years of sourcing its research from UBS, ASB Securities has decided to go it alone. It has appointed David Boyce (formerly of ABN Amro) as its new head of research. ASB's Steve Jurkovich says the move is part of an evolutionary process to beef up client services. The company wants to offer research that is more specifically tailored for its retail clients and plans to use the sizeable resource of economic research it can draw from ASB and its parent company, Commonwealth Bank of Australia. Boyce takes up the role from the start of next month assisted by analyst Charlotte Preen.

Media mash-up

Anyone who still has their jaw hanging open after last week's $700 million Trade Me deal should consider that its buyer - John Fairfax Holdings - is being tipped as a takeover target in an imminent shakeup of the Australian media scene.

A new law which will relax media ownership rules across the ditch has Aussie pundits picking a consolidation of the sector. Without a majority controlling shareholder, Fairfax is considered vulnerable to takeover plays from the likes of James Packer's Publishing & Broadcasting, CanWest and other foreign media groups. Macquarie Bank's media fund is another possible contender ... and there's also an old bloke called Rupert who's just been born again as an internet guru. So who knows who might have their hands on Trade Me 12 months from now.

Stone the escrow

Word around the traps is that Graeme Hart's bankers at Credit Suisse (First NZ Capital, locally) might be running an escrow account for the Carter Holt Harvey offer.

An escrow is a fund which allows investors to effectively "pencil in" the sale of their shares without making the final commitment until the last minute. If true, it means that - on paper at least - Hart may already be past the 90 per cent threshold he needs to take control of the company. However, the Rank Group is likely to file a substantial shareholders' notice today showing it is within a whisker of 90 per cent.

Meanwhile, as other export stocks soar, forest industry watchers continue to bemoan (and/or celebrate) Hart's shrewdness at grabbing control of CHH at the absolute peak of its high kiwi dollar woes.

Liquor to split

With Independent Distillers refusing to talk, getting goss on the potential sale of the company has been like squeezing fizzy raspberry cocktails out of a stone. Thank goodness for a tenacious British trade magazine - The Publican - which has reported that Liverpool-based drinks company Halewood is in advanced talks to buy the UK and European division of the late Michael Erceg's company.

This would seem to indicate that splitting up the company is being seriously considered by the Erceg family. It's a logical move and one likely to make any future sale of the Australasian business (to the likes of Lion Nathan) even more likely.

Talk is cheap

How's this for a case of talking out of both sides of one's mouth? In announcing that Vodafone NZ would offer broadband internet services by the end of the year, chief executive Russell Stanners ironically came to Telecom's defence this week by coming down hard against the need for regulation of the industry. Vodafone brought competition in mobile phones to New Zealand, he said, and it would do the same in broadband.

The Commerce Commission must have a sense of humour because the next day, it announced it would investigate Vodafone's request for interconnection regulation on hybrid mobile-home phones. Seems like Stanners wants it both ways.

Monday is cookie time

Final bids are due in for biscuit company Griffin's this Monday and it is understood the number of interested parties has crumbled away to the usual suspects - namely Graeme Hart and Australian private equity group PEP.

Griffin's, which is owned by Danone, makes about $40 million a year and could sell on an earnings multiple of 7 or 8 times - giving it a price of around $300 million.

"If the price has a two in front of it, it will probably be Graeme; if it's three hundred and something then it will be PEP," said one interested observer.

Griffin's has a fantastic stable of brands including Kiwi classics such as Mallowpuffs, Toffeepops, Gingernuts and Shrewsbury.

But Hart is the most disciplined buyer in this part of the world so, despite the strong brands, he is unlikely to be sweating over the possibility of missing out on Griffin's.

PEP, on the other hand, has been prepared to pay full prices to get hold of assets.

Meaty proposal

Talley's bid for full control of Affco this week is yet another example of a player with a long-term view taking advantage of short-term negativity.

To be fair to Talley's, its timing is probably more to do with ensuring that no one else gets any takeover ideas than with making a quick profit off the share price. And the stability of a majority shareholder isn't a bad thing for a listed meat-processing company. Industry watchers will still recall the bloody mess that was the PPCS takeover of Richmond. It dragged on for seven years.

Of course, none of that is to say that shareholders shouldn't look to extract a little more of a premium for handing over control. The 40c-a-share offer - although 11 per cent up on last week's trading price - is still pretty low when you consider the stock has traded as high as 47c in the past 12 months. Despite a drop in commodity prices this season, and some pain from the final effects of the high dollar, there is good news on the horizon.

Affco is primarily a beef exporter so is likely to continue to benefit from enhanced market access in Japan after another confirmed BSE case in the United States last week. It has a strong balance sheet and, after several years of restructuring, is well placed to benefit next year - if we are, indeed, in a low kiwi dollar phase.


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