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FGL – Strategy briefing yesterday

Yesterdays presentation day was not about numbers, rather the strategy Foster's will employ to deliver double-digit EPS growth over the medium term. Management appears confident its guidance will be achieved, which increases our comfort levels.

Investment View
We increase our price target to A$6.50 (from A$6.25), reflecting an increased comfort level that Foster’s will not only successfully integrate Southcorp, but successfully implement the multi-beverage strategy in Australia. With no changes to our forecasts, our DCF-based valuation remains at A$6.74 per share.

We recognise that the integration of Southcorp, nor the concurrent multi-beverage integration of Beringer Australia and CUB, is not without risks. Key amongst them are brand cannibalisation and over reaching on expectations. Other risks include currency, agricultural and competition risks.

Strategy outtakes
Whilst no new numbers were provided, we received increased comfort that Foster's could and would integrate Southcorp successfully. Key outtakes were: the organisation is committed to ensuring the success of the integration and the multibeverage strategy across the board (not just the CEO), the scale and breadth of Foster's' offering could be considered unique, the wine strategy will be based on the core five brands however the tail has a purpose and is unlikely to be sold in the near term, most of the savings are expected to be supply chain based where the implementers have previous supply chain improvement experience and the net cost savings of A$130m to A$145m (achievable by FY08F) are an achievable rather than stretch target.