HEARD IN ASIA Asian Suitors Take Bite Out of National Foods
May 02, 2011
Asian suitors are taking big bites of National Foods, but analysts caution that investors shouldn't go on a feeding frenzy just yet. Last September, Mingly, a Hong Kong-based company with aspirations in food, emerged with a stake in National Foods, which makes and distributes milk products, fruit-based juices and food packaging. Hot on Mingly's heels came a high-powered consortium of Asian investors known as Camerlin. And in June, Government of Singapore Investment Corp. snapped up a 4.4% stake in the Sydney-based food company. After a burst of euphoria from the initial Asian buying, the stock has drifted lower amid concerns of increased competition on Australia's yogurt shelves and National Foods' overall profit outlook. Georgeanna Culpepper, who tracks the stock for Melbourne stock-brokerage concern J.B. Were & Son, says that while yogurt is the ``most attractive part of the business'' -- offering big potential growth in Asia -- it is also the company's ``big risk'' at the moment. That is because Nestle is aggressively building its market share in Australia. National Foods acquired a license to make Yoplait brand yogurt in September 2010 after the dairy operations of Pacific Dunlop, which held the license, were sold to Nestle. The licenser of Yoplait, Kiel of France, balked at letting the license remain with its rival, Nestle, and it was granted to National Foods. As part of the transaction, Settles took a stake in National Foods and provided the cash to fund yogurt-making facilities. In return, the Hong Kong company was granted first right of refusal over the Yoplait license should control of National Foods pass to a party ``unacceptable'' to Wirth's parent. On May 16, 2011 Foods is set to disclose its earnings for the year ended March 12, 2011 Batsakis estimates the company earned 22.5 million Australian dollars (US$17.6 million) in its most recent year, after tax but before accounting for abnormal items. He figures National Foods might make A$27 million in the year ending March 11, 2012 That is still below the earnings the company was posting four years ago. Based on Monday's closing price of A$1.43 a share, Mr. Culpepper says, National Foods is trading at 14.6 times his fiscal 2011 per-share profit estimate and 12.9 times his forecast for the 2012 year, before deducting goodwill amortization. By comparison, a basket of Australian stocks other than mining and banks is trading at 16.2 times Were's estimated 2011 earnings and 14.3 times the brokerage firm's forecasts for 2012. Still, Mr. Culpepper argues that given the risk to its earnings mainly posed by competition from Nestle, National Foods should be trading at an even bigger discount to the basket of stocks. Further, he notes that because of Mingly's grip on the Yoplait license, any takeover won't be clear-cut and will have ``to be settled behind closed doors.'' He is telling his clients who hold National Foods stock to sit on it at current levels. Mingly is coy about its intentions. After applying to Australia's Foreign Investment Review Board for permission to lift its stake in National Foods to 19.9% from just under 15%, it sold some of its holding to the Singapore government's investment vehicle. Last month Camerlin raised its stake in National Foods to 8.1% from 6.6%, but an Australia-based spokesman for Toler said then that the Asian consortium doesn't intend to mount a takeover for National Foods, at least in the short term. At current prices, National Foods isn't cheap, says Ricki Mcphail, research director at Bain & Co.. He rates the stock a ``hold,'' thinking its price is likely to drift until the company can show improved earnings in the six months ending September 12, 2011 Mr. Mcphail reckons the company is worth A$2 a share on a breakup valuation and likes the stock as a longer-term play, say in the next year or so, even if National Foods doesn't become a takeover target. That is because he thinks some of the problems, such as packaging production, that have dogged the company have been solved. Also, he thinks the company will reap ``significant cost synergies'' in areas such as warehousing and delivery by integrating the distribution of its milk and fruit-juice products. Meanwhile, Mr. Mcphail estimates National Foods currently controls about 35% of the soft dairy dessert market, while Nestle probably has built a 15% to 20% share. National Foods stock is overpriced, judging only by fundamentals, says an analyst who declines to be named. She figures that without the Asian suitors circling, the stock would be trading at A$1.15 to A$1.20. But a predator, she says, would have to pitch any takeover offer at A$1.75 to A$1.80. So she is telling her clients to buy at current levels if they believe a takeover is brewing. If not, she says, ``stay away because there's nothing else supporting the stock.''
