Two Bids, Two StoriesAugust 01 2006 - Australasian Investment...

Two Bids, Two Stories
August 01 2006 - Australasian Investment Review – (AIR)

Wattyl the paint company, and automotive parts group Pacifica have just been on the end of negative decisions in takeover offers.
Wattyl's offer from Barloworld of South Africa was rejected by the ACCC on competition reasons, leaving the company alone to face the vagaries of the soft NSW and Victorian housing market, a primary area of business

But brokers Citigroup believe that Wattyl could be better placed than some investors thinks.

It has just told investors that it "has upgraded its rating on Wattyl to Buy / High Risk (1H) from Hold (2H), and revised our target price to $3.20 (previously $3.80). ($2.95 close on Monday).

"Wattyl is back in control of its destiny, following the ACCC’s rejection of the bid from Barloworld, and it is business as usual as it continues to implement the restructuring initiatives kicked off by CEO John Nolan in mid-2005. Furthermore, management is confident that the distraction caused by the bid process was well contained.

"The company recently confirmed its EBIT forecast of $19.7m for FY06, and that it remains on track to achieve the $22m in planned costs savings (FY07 over FY05). Given the company’s comment that demand has been "subdued", achievement of the FY06 EBIT target implies better than expected progress on cost cutting.

"Continued weakness in the housing market (particularly NSW), represents the main threat to Wattyl achieving its "target statement" forecasts for FY07 – the 8% fall in 2H’06 sales posted by Alesco’s building & renovation division is clear evidence of the difficult market.

"Accordingly, we have taken a hardline (perhaps too hard) on our forecasts for FY07E and FY08E, opting to factor in a slower recovery in housing/renovations. This has led to 19% cuts to EPS in each year.

"Despite the revisions the stock looks cheap, trading on PERs of 11.2xand 9.2x for FY07E and FY08E, and dividend yields of 7.5% and 9.1%, respectively (post payment of 40¢ special dividend). While by no means a growth stock, Wattyl is well worth a look for value investors."