Category Archives: australia

Buyers Turn Scarce in Australia

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Carla Gottgens/Bloomberg News
People passing by, but not enough going in

By David Rogers and Ross Kelly

Australian shares bounced off a two-week low, but still finished the day down 0.5% as retailers took a hammering—Harvey Norman down 4.6%, JB Hi-Fi down 5.3% and Myer Holdings down 6.4%.

And then there’s David Jones, which may get the blame for the others’ troubles; it fell 18% to a two-year low of 3.20 Australian dollars (US$3.44) after the upscale department store delivered a profit warning Wednesday, saying it’s witnessing a dramatic and rapid deterioration in trading conditions. It said profit for the second half of the current fiscal year could be down 12%—it had  previously pointed to a 5% rise—and first-half profit for fiscal 2012 could be down 20%.

“David Jones has certainly created some problems for the market,” Justin Gallagher, head of domestic sales and execution at RBS. “Obviously the implications for domestic consumer health aren’t good.”

Deutsche Bank, which cut David Jones to hold from buy after the warning, said, “While we continue to expect an eventual recovery in sales growth, given the speed and depth of the deterioration in June, we have pushed the expected recovery out and downgraded our longer-term sales growth expectations.”

Macquarie kept its outperform rating on David Jones, but lowered its price target to A$3.89 from A$4.80 and said the profit warning “signals a breakdown in David Jones management to accurately and reliably predict sales and earnings.”

But Citi, while saying the Australian retail sector is likely to remain out of favor until better sales momentum emerges, does argue that the David Jones’s weak fourth-quarter sales are likely to be the worst of the major listed retailers and that the price/earnings ratios of many of them already reflect the risk of a cut in their profit outlooks.

A Wine-Free Foster’s Makes Its Debut

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By Ross Kelly

SYDNEY–Foster’s Group Ltd. was officially unshackled from its underperforming wine assets Tuesday, but the market remained unconvinced that a takeover of the iconic Australian company is imminent.

Foster’s is now a pure-play beer outfit, valued by investors Tuesday at A$8.9 billion on its first day of trade on the Australian Securities Exchange. The wine assets, housed in new entity Treasury Wine Estates Ltd., were valued by the market around 2.1 billion Australian dollars (US$2.26 billion).

Since Foster’s bought it 15 years ago, the wine business has been plagued by grape gluts, bad weather, the financial crisis and a strong Australian dollar making it difficult to grow sales in key markets such as the U.S.

The asset was considered a poison pill for any potential suitors, and the beer group’s share performance Tuesday shows that the demerger has already had its desired effect of increasing shareholder value.

Before the demerger, the old Foster’s had a market capitalization of A$10.6 billion. The market is now valuing the two new companies combined at A$11 billion.

Australians are among the biggest beer drinkers in the world, in terms of volume per capita, and the nation’s population growth is forecast to outstrip the U.S. and Western Europe, making it an attractive place to invest.

Goldman Sachs analysts have also noted that Australia has a stable duopoly beer market, with the top two players having a combined market share of close to 90%.

But the sheer size of the deal that would be required to buy Foster’s limits the number of potential acquirers, and the current strength of the Australian dollar could be putting them off.

“We remain unconvinced that bidders are lining up,” Citigroup analysts said Tuesday.

While the broker has applied a 25% bid probability in its A$4.50 a share valuation of the new Foster’s, it said the strong Australian currency makes the company more expensive to foreign suitors, while its financial metrics are currently unattractive. “The Foster’s share price needs to go down before it can go up,” Citigroup said.

Foster’s shares opened trading at A$4.57 Tuesday, down from their last trade of A$5.48 when wine was still part of the business. Analysts expected Foster’s to be valued somewhere around A$4.50, so Tuesday’s performance was broadly in line with expectations.

Goldman Sachs valued the demerged Foster’s at A$4.70 a share, partly because of a favorable ruling in a tax dispute this week, and factored in an extra 30 cents to reflect the possibility of takeover activity. “Accordingly, we expect Foster’s to trade between A$4.70 and A$5.00 in the near term,” the analysts said in a note Monday.

Representatives for Fosters weren’t available to comment Tuesday.

The number of potential suitors, however, could be limited to just a few such as SAB Miller PLC or Anheuser-Busch InBev NV, Citi said.

The strong currency, lack of global brand and Australia’s isolated geography could also act as a deterrent, it said.

Still, Goldman Sachs says “there is a good chance of a takeover of Foster’s on a three-year view.”

The company’s shares drifted lower to close trade at A$4.53 each, while Treasury Wine Estates finished a little higher at A$3.36.

Fairfax Media Shares Slide 8% After Company Forecasts Earnings Drop

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By Ross Kelly

Fairfax Media Ltd. shares are down 8.8% to 1.20 Australian dollars (US$1.31) in Sydney after the publisher of the Sydney Morning Herald, the Age and the Australian Financial Review newspapers said it expected its operating earnings for the fiscal year ending next month to be down 6.1%, to 600 million Australian dollars (US$656 million) from last year’s A$639.1 million.

Bloomberg News
Extra! Fairfax shares tumble on weak forecast.

Revenue in the second half of the financial year is running 4.5% behind last year’s, Fairfax said, at the lower end of its forecast range. In its interim results release in February the company had said “second-half revenues could be in the range of plus or minus 5% on last year.” Operational costs, meanwhile, are tracking 1% higher than following the development of new iPad applications and recent small acquisitions. “While the rate of decline in advertising levels has abated slightly over the past month, the company does not anticipate market conditions over the remainder of the current financial year improving sufficiently to offset the declines experienced to date,” Fairfax said in a statement.

Australian Dollar Soars on Inflation

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By James Glynn

Australia’s inflation rate rose more than expected in the first quarter of 2011 due in part to soaring world oil prices and a flood-induced food price spike, sending the Australian dollar sharply higher and narrowing the odds of an interest rate increase in coming months.

The consumer price index rose 1.6% in the first quarter from the fourth quarter of 2010 and rose 3.3% from a year earlier, the Australian Bureau of Statistics said Wednesday. Economists had expected the CPI to rise 1.2% on quarter and rise 3.0% on year.

Core inflation, which is crucial to policy making at the Reserve Bank of Australia, rose by an average of 0.9% in the first quarter, easily beating an expected rise of 0.6%.

The big increases to the CPI in the quarter came from food prices, health and education costs, the ABS said. Much of this was expected, but economists said the spike in core inflation will be “hard to dismiss’ at the RBA.

Adam Carr, senior economist at ICAP, said the RBA must hike interest rates now as inflation is clearly a problem. “This is no longer funny,” he said, predicting the next hike could come in June.

The Australian dollar rallied to a fresh 29-year high of US$1.0851 after the CPI report. The currency was trading at US$1.0826.

The RBA uses a 2%-3% inflation target over the course of the economic cycle as the basis of its policy making. It has raised interest rates seven times since late 2009, pausing since November with the cash rate target at a slightly restrictive 4.75%. Three-year government bond futures prices weakened sharply, falling 7 ticks to 94.84 on the CPI data.

Stephen Walters, chief economist at JPMorgan, described the inflation data as “punchy.” He said while there is no immediate “bell ringing” for the RBA, it is increasingly clear interest rates are set too low.

“On the cusp of the biggest mining boom in history, and with no spare capacity” the next move in interest rates is clearly higher, he added.

With utility costs like electricity prices climbing, the danger now is that this inflation problem becomes entrenched in consumer expectations, posing a genuine risk that wages pressures will rise further, he said.

This is the trough for inflation, Mr. Walters said.

Already the RBA has highlighted rising wages, noting the pace of increase has returned to that seen before the global financial crisis.

“The risk of the RBA moving again in the next few months has certainly increased after those numbers,” said Brian Redican, senior economist at Macquarie Bank.