foster's group (fgl) $5.50

Foster's Group (FGL) $5.50

Tim Boreham | September 10, 2009
Article from: The Australian
KRAFT'S play for Cadbury will inspire predators to look closely at fast-moving consumer goods.

HERE'S some food (and beer) for thought: global food maker and reformed fag manufacturer Kraft's $US16.5 billion tilt at Cadbury will spur predators to take a wider look at fast-moving consumer goods (FMCG) stocks.

The idea is that the valuation multiple implied by the Cadbury offer -- which is likely to be sweetened -- makes our FMCG stocks look cheap. And what better starting point than our biggest brewer and wine maker.

According to Southern Cross Equities, FMCG stocks have been marked down to their lowest valuation multiples that he can ever recall. “When one FMCG company embarks on a large scale M&A others will follow,'' the firm says in its daily newsletter.

The firm notes that Foster's stock is trading on a current multiple of enterprise value to EBITDA, compared with its average of 11.1 times.

Cut another way, Foster's is trading on a price-earnings multiple of 13.4 times forecast 2009-2010 earnings, compared with Cadbury's (likely) 22 times in the event of a higher n agreed bid.

What's more, Foster's produces a 20 per cent return on equity compared with Willy Wonka's 13.6 per cent.

“This transaction highlights that M&A activity will continue for quality assets with strong consumer franchises, which will continue to place Foster's brewing assets in the spotlight,'' the firm says.

Of course there's a reason Foster's shares have been marked down: the laggard wine division. But Southern Cross argues Foster's current valuation assumes the wine division isn't worth anything.

Given other recent brewing takeovers such as Kohlberg Kravis Roberts' purchase of Korea's Oriental Brewery and Kirin's takeout of Lion Nathan's minorities, Southern Cross suggests Foster's stock should be worth $7 a share.

A counter argument is that we've heard Foster's takeover theories ever since the long-gone days when real men drank VB and a blonde beer was a shandy for the ladies. No-one emerged with an agreed offer when Foster's was much more vulnerable.

Criterion last had Foster's as a HOLD at $5.20 on April 24. Our rating is under review.

Coca-Cola Amatil (CCL) is another classic FMCG stock, but as Lion Nathan discovered it's tricky dealing with Coke's Atlanta head office.

http://www.theaustralian.news.com.au/business/story/0,28124,26053459-23634,00.html