japanese thirsty for foster's

Japanese thirsty for Foster's

STUNNING second-quarter Singapore GDP numbers backed a relatively upbeat NAB monthly business survey to give stockmarket punters some joy yesterday. Of course, now is not the time to be blindly bullish, with US government debt tipping over the $US1 trillion mark, and the Chinese administration showing real signs of strain as it tries desperately to restore control in a most unfriendly fashion.

It is also a quiet time before the full-year profit numbers are released and, while the bulls say the bad news is factored in, investors are best advised not to front-run the numbers.

This said, Merrill Lynch's longtime bear David Errington helped propel a 5.7 per cent increase in Foster's yesterday with a bullish note after four years of woe.

The Errington thesis was simple: while the company was wrong to spend $7bn on a wine business that was only ever going to produce $400m in cash, the company was being materially undervalued.

His 2009 year forecast of 39c a share in earnings is in line with the market, but his 2010 year number of 45c a share is way ahead of the likes of Macquarie at 40.2c a share and RBS at 41c a share.

Time will tell whether he is correct. The bottom line is that if Choco Johnston's team at Foster's don't produce the goods, then someone else will.

Conventional wisdom has always been that the wine business was a great poison pill, but the Japanese beverage giants are throwing such wisdom out the window with a long-term push to buy foreign assets.

Errington has Foster's earning $1bn a year before interest and tax from beer, which puts an enterprise value of the company at $12bn, implying the wine division comes free of charge.

It might be a basket-case, but it will generate $350m in cash in the 2009 year. The global financial crisis has knocked sense into all those folks who thought just planting grapes was a guaranteed path to a fortune.

If the talk is right and Kirin and Suntory merge, then why wouldn't Asahi take a look at Foster's?

Some $15bn-plus of Australian food and beverage assets are now under Japanese control, including the likes of Frucor, Dairy Farmers, National Foods and Lion Nathan.

The reason is that while the Australian market may not be growing fast, it is safe. If you are based in Japan, the demographics are atrocious, with more people retired than of working age.

The cost of domestic capital has never been lower and, all things considered, what is considered good value from these shores looks very cheap from Japan.

If Choco's team at Foster's don't produce the goods, the prospect of a takeover is more real than some imagined.

Cultural change takes a while, but what Johnston has done is create more visibility around divisional earnings by splitting beer and wine.

It's a back-to-basics approach, working on the theory that wine and beer are fundamentally different products, made and sold in a different way.

His timing may just be right given the economic gloom will keep expectations low, allowing anything approaching outperformance to shine.

http://www.theaustralian.news.com.au/business/story/0,28124,25783333-5013408,00.html