doesn't really add much to anyone's understanding, but i pulled...

doesn't really add much to anyone's understanding, but i pulled together a few thoughts over the weekend:


AWB’s share price has declined 27% from an all-time high of $6.41 on 12 January 2006 to its closing price of $4.63 last Friday. With increasing speculation that the AWB will face structural change as a consequence of the Cole Inquiry, it is timely to assess what the current share price tells us in relation to market expectations for this change.

Prior to the events of the last few weeks, most analysts were valuing AWB slightly below its trading price, with valuations generally in the range $5.00 – 5.60 per share.

Current controversy around the Iraqi Oil-for-Food arrangements would be expected to reduce the medium term performance of AWB (with some impact on value) even in the absence of structural change to the business. This is the case as AWB is currently in a state of internal upheaval. The CEO resigned last Wednesday, and senior management is going to be distracted from core business operations for some time to come. In addition, press reports are now emerging that wheat sales that would previously have been secured by AWB in certain markets (particularly Iraq) will now go to other suppliers. Any difficulty experienced by AWB in maintaining its markets would both reduce short term profitability and increase the risk of structural change being imposed.

However, analysts and commentators are increasingly expressing the view that structural change is inevitable. There are two major forms of change which would be possible:
1) Removing the AWB’s ability to veto any application for a wheat export licence from Australia. It is through this veto power that the AWB ensures that the single desk is the only conduit through which wheat can be exported;
2) Either abolishing the single desk, or transferring its operation to a grain company other than AWB.

Two leading analysts have sought to quantify the valuation impact of structural change in recent days. JP Morgan assessed the company’s value at $4.75 per share in the event that AWB loses its veto power and the company’s share of the export grain market is whittled away by 1 percentage point per year through until 2020. Lower valuations would result if the rate of market share loss were greater, while the base case valuation would reduce to $3.00 in the event that the single desk were lost. Macquarie has assessed the company’s value at $3.17 in the event that the single desk was lost.

If we assume that JP Morgan is correct in stating “the removal of AWBI’s power of veto over new export licences would be the best case scenario for AWB”, then we are left with two broad valuation scenarios:
1) Veto Lost – Valuation approx $4.75 per share;
2) Single Desk Lost – Valuation approx $3.00 per share.

Using these two measures, the share price of AWB can be used as a crude barometer for assessing market expectations of the single desk either being abolished or transferred to another operator. Every 17.5 cents by which the company’s share price falls below $4.75 represents a 10% increase in the market’s assessment of the probability that AWB will lose the single desk.