Australia | Jul 19 2006
By Chris Shaw
Chiquita Brands South Pacific (CHQ) has not been a good performer in recent years, the stock suffering from a succession of earnings downgrades thanks to both weather related issues such as Cyclone Larry and management’s decision to exit its lower quality operations.
This makes the takeover offer of $0.73 per share made yesterday by a joint venture between Chiquita’s major shareholder Costa Group and Timbercorp (TIM) somewhat opportunistic, but as Austock Securities notes a successful outcome would be a positive for Timbercorp, which it rates as Buy with a price target of $4.30.
In the broker’s view the joint venture partners are more natural owners of Chiquita’s assets, as they have the funding and management to extract maximum value out of what are market leading positions in mushrooms, berries and farm management.
Timbercorp has estimated the deal will be earnings accretive if it is successful, the broker agreeing with this but pointing out the earnings boost would only be around 2% in the short-term. The upside looks better over the longer-term though, as the broker suggests this year should be the bottom for Chiquita’s earnings and FY07 should see a rebound. It estimates the company is capable of generating earnings before interest and tax of about $20m, which compares to about half that amount this year and $14m last year.
This suggests the purchase would be a case of getting assets relatively cheaply, as the broker’s valuation for Chiquita is around $0.75. It notes it would also provide additional opportunities for Timbercorp in terms of establishing new managed investment schemes, so driving earnings growth in the future. As well, Costa Group will seed additional assets into the joint venture if the Chiquita bid is successful, so providing further growth potential.
The broker’s longer-term earnings outlook for the company is already positive without adding in Chiquita, as on its estimates net profit is forecast to increase from $67.1m last year to $77.6m this year, $90.4m in 2007 and $106.7m in 2008. This equates to a Price/Earnings ratio of around 11x in 2007 and just over 9x in 2008, so the stock doesn’t appear expensive.
The market overall appears less convinced on the company’s prospects though, the FN Arena database showing Timbercorp is rated once as Buy, once as Sell and twice as Hold with an average price target of $4.09. This is similar to the median price target of $4.15 according to Thomson One Analytics, which is based on median earnings estimates slightly above those of Austock.
Timbercorp shares have traded between $2.11-$4.10 over the past 12 months and are currently trading at $3.57, which compares to a last closing price of $3.61.