After shuttling between $4.20 and $4.50 this year, there are positive reasons for the company's share price to finally move higher.
Price movement After shuttling between $4.20 and $4.50 this year, there are positive reasons for the company's share price to finally move higher. Foster's has successfully concluded the sale of its Australian Leisure and Hospitality Group (ALH) and the Australian Leisure and Entertainment Group (ALE) into two separate property trust floats.
Profile The company is run along four divisional lines around its core activities of alcoholic beverages. Carlton & United Breweries generates about 45 per cent of net profit from beer. Beringer Blass Wine has now almost matched that, with 42 per cent. Australian Leisure and Hospitality generated 12 per cent net profit, with these earnings coming from its property holdings and investments (now sold). Continental Spirits distils and distributes whisky, vodka, etc, in Australia and New Zealand, and generates
1 per cent of net profits.
Current details Foster's full-year net profit was up 9 per cent at $627 million and slightly ahead of market expectations. Surprisingly, its result relied heavily on its brewing business as its American wine investments dragged down the result. Its Californian wineries experienced a good growing season, which lead to excess wine production and consequent discounting. The strengthening Australian dollar also hampered US profits.
The company is concluding the spin-off of two subsidiaries through an IPO that will give Foster's up to $1.4 billion to retire debt. Foster's has established long-term supply contracts to ALH/ALE pubs, thereby reducing its risk while liquidating its property asset portfolio, possibly at the top of the market.
At the company's AGM, management said that they were not looking at acquisitions unless there was a compelling reason. Its profit outlook guidance for this year is for steady earnings. It is selling on a 14 times price-to-earnings ratio, and has a dividend yield of 4.5 per cent.
Sector The beer market in Australia is a relatively stable duopoly, with Lion Nathan having 45 per cent and Foster's 55 per cent.
Wine rival Southcorp is in severe structural straits after aggressive discounting, following a wine glut in Australia.
Further rationalisation will occur in wineries in Australia, but valuations are likely to be cheaper. Southcorp will not have the capital to make acquisitions and Lion Nathan will be Foster's competitor. Lion Nathan is focusing on premium wine brands, whereas Foster's focus is on the mass wine market.
Worth buying? Foster's is a defensive stock with stable earnings. Presently, there is a strong likelihood of a share buyback, capital return and/or special franked dividend from its subsidiaries sale. This will be attractive and the stock will be re-rated upwards. Buy.
Geoffrey Hill is presenter of ABC NewsRadio's afternoon finance report and an independent private client adviser. Visit www.ghill.com.au
