Australia | Jul 19 2006
By Chris Shaw
In most cases when a takeover offer is made for shares in a company you own the advice of the experts is to wait and see, particularly as any potential downside in the stock is limited by the implied support of the offer price.
Colorado Group (CDO) appears no different, as most brokers have the stock on a Neutral rating following the $4.50 per share bid announced yesterday by 19.9% shareholder Affinity Equity Partners.
GSJB Were suggests investors will be in a far stronger position to assess the worth of the offer in September as the company will then report its latest earnings result and the market should have received a better indication as to how recently appointed CEO Mel Sutton intends to reverse a period of poor performance.
The broker points out this will be important, as in its view earnings risk for FY07 remains to the downside given its two major divisions, Colorado and Williams, continue to struggle. It rates the stock as Marketperform, L/T Hold, though its valuation of $4.65 is slightly above the current offer. It suggests an accumulation of shares by hedge funds is the most likely precursor to a higher offer rather than any improved earnings outlook.
JP Morgan also suggests there is downside earnings risk in FY07 thanks to a poor product range and the resultant risk of excess stock, which may produce some margin compression as the stock is cleared.
The broker rates the company as Neutral with a $4.50 target, but recently lowered its valuation to $4.07 from $4.40 to reflect what it sees as a higher cost of capital going forward. Despite the bid being higher than its valuation it suggests a higher price may be needed to secure control, though it doesn’t expect this to come from an alternative bidder.
UBS also notes the bid appears a bit skinny in that it doesn’t include any control premium, as on the broker’s estimates it is pitched at just 11.6x cash-adjusted earnings per share. It suggests the bid actually highlights the value in the group as it will bring forward the market’s focus on the company’s recovery potential, which wasn’t expected to show up in earnings until FY08.
Given the depressed level of current earnings the broker sees potential for a higher bid, but it has set its target price at $4.50 and retained a Neutral rating. ABN Amro has a similar rating, but points out as one condition attached to the bid by Affinity is the company reports 1H07 earnings before interest and tax (EBIT) of $14m, meaning there could be some upside risk as management has previously indicated it expects a flat result for the period of closer to $10.2m.
As a result, the broker suggests shareholders wait for Colorado to respond to the offer, which is a hostile one given the two companies could not reach any agreement after nearly three months of negotiations.
Colorado shares closed yesterday at $4.60, but have fallen slightly today and last traded at $4.53.