I am thinking of investing in FGL as many rate it a buy. Not...

I am thinking of investing in FGL as many rate it a buy. Not Merrill Lynch though. Note his comments "that the biggest concern about Foster's was its inability to generate cash."

It has been unable to make a break from its current price.

Any comments?

Foster's telling it 'like it isn't'
By Leon Gettler
Beverages writer
July 8, 2005


Merrill Lynch has fired another blast at Foster's Group, accusing the drinks company of artificially inflating its earnings by creating "hollow logs".

In a savage note to clients, Merrill Lynch analyst David Errington said Foster's found the "logs" by writing off nearly $600 million of wine and beer assets over the past two years.

He said this allowed Foster's to deliver itself an apparent windfall by selling these at prices above their "realisable value".

Mr Errington's assertions undermine the view that Foster's will generate double-digit earnings per share (EPS) growth over the next few years.

He said the real problem for investors was that they would "never know if future profits are manufactured or overstated".

"We hope the market is sophisticated enough to dismiss what the company 'says' it can achieve, and work out for itself what Foster's is likely to achieve, given the circumstances the company faces," he said.

A Foster's spokesman yesterday rejected the claims. "We've just recently refinanced $3 billion in borrowings," he said. "That speaks volumes for our performance, investment-grade credit standing and prospects."

Mr Errington's claims come after ratings agency Standard & Poor's downgraded Foster's to just one notch above junk status.

The maverick analyst's position contrasts with the line taken by other analysts this week.

Macquarie Equities expected Foster's to report a "strong" result in August and follow it up with substantial synergies.

ABN Amro's David Cooke said Foster's, which yesterday fell 6 ¢ to $5.29, was undervalued. He tipped cost savings to deliver double-digit EPS growth and said the company was also starting to benefit from the US wine market's recovery.

Mr Errington, who broke ranks last month and slapped a "sell" recommendation on Foster's following its $3.2 billion acquisition of Southcorp, compared Foster's to two classic market underperformers of the past, Pacific Dunlop and Goodman Fielder.

He warned that companies that wrote off assets to boost EPS growth in the near term had a track record of not surviving.

"Over the many years we have been analysing equities, we have witnessed companies such as Pacific Dunlop and Goodman Fielder, to name but two, consistently write down assets," Mr Errington said.

"And we have seen such companies struggle to survive as independent corporations despite the 'opportunity' to grow EPS in future years after the asset write-downs have been made.

"The reality is that when a company continually writes down its assets, something is seriously not right with the company and/or its underlying business model."

Mr Errington claimed that the biggest concern about Foster's was its inability to generate cash.

Over the past four years, he said, the company had been unable to generate enough free flow post-capital expenditure to even pay its dividends. "Over the past four years, Foster's has had to borrow money to pay its dividends."

He said this would only get worse, with nearly 40 per cent of its assets now concentrated in the low-cash-generating Southcorp business and the fact that Southcorp itself had been unable to pay a dividend for the past two years.