Friday, May 13 2011
Fosters split this week, into Foster’s Group Limited (FGL) for the beer business, and Treasury Wine Estates Limited (TWE) for the wine business. The combined value is up +2% on yesterdays close. We have included a simple valuation analyser below:
- The beer division should settle down around these levels. The value does not look too contentious and upside is provided by potential takeover.
- Other than takeover speculation we think the beer business will be driven by a recovery in volumes (following the cold wet summer) and pricing (which has settled down after a period of competition for the lower volumes). In addition management focus will be on driving improved productivity. The key risk is the major retailers attempting to push home brand beer to undermine margins (we think low risk) and Fosters being able to replace the declining VB brand (higher risk).
- Wine could be volatile. It has no debt and earnings are extremely sensitive to the currency. Book value is worth $4.50 a share, we note this is written down book value. Champ (a private equity group) bought Constellation at 60% of non-written down book value. There was a private equity bid that equated to $3.4 – $4.00 a share (although CCY was a little lower) last September. We think this is a no brainer for private equity. They can have some patience on the currency, can gear the entity, and can sell some non earning assets (eg Europe). If the stock stays at current levels for long, private equity will be back. The flip side is that at a A$/USD of $1.15 the stock would be on 26.5x FY11 earnings which looks expensive.
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