Australia | Aug 16 2006
By Chris Shaw
As a regional bank the Bank of Queensland (BOQ) has often been touted as a potential takeover target but rather than wait for such an outcome management has gone on the offensive by making a bid of its own, offering $4.78 per share to acquire Pioneer Permanent Building Society.
The deal values the building society at $49.6m and has been recommended by the board in the absence of any higher offer. As it is due to be completed by November the acquisition is unlikely to impact on earnings in FY06.
First analysis by brokers covering the stock shows the purchase is expected to be positive for earnings in the longer-term, Deutsche Bank estimating it will add around 1% to earnings per share in FY07 and 3-4% in FY08 and FY09.
The broker notes much of the upside comes from cost savings, as it points out Pioneer has a cost to income ratio of 86% compared to 62% for Bank of Queensland. Macquarie agrees with the assessment, suggesting cost savings provide much of the scope for the deal to enhance earnings in future years.
It also points to upside from expanding the bank’s branch network throughout Queensland, as Pioneer currently has 15 branches, 30 outlets and 10 agencies across the state. ABN Amro agrees this is a positive for the bank, as the Pioneer branches are concentrated in the central and northern parts of Queensland, where the bank is not as well established.
Following news of the proposed acquisition Deutsche has upgraded its rating to Hold from Sell, though it points out this also reflects recent share price weakness bringing the stock back to a more appropriate earnings multiple. It continues to have some valuation concerns on the stock tough, as it notes on FY08 earnings the bank is on a multiple of 14.4 times, which is a 16% premium to the major banks and seems unjustified in its view given the potential earnings risk.
This risk comes from any potential losses due to a fall in credit quality, which while currently not a problem may become one given interest rates are moving higher. The broker estimates if loan loss rates were to return to more normalised levels, it could impact on FY07 earnings by as much as 15%, though it stresses this is a worst-case scenario and so is unlikely.
The broker is forecasting earnings per share of 76c in FY06, 85c in FY07 and 93c in FY08, which compares to Macquarie’s estimates of 85.3c, 97.8c and 110.4c. By way of comparison, the median earnings estimates according to Thomson One Analytics are 77c, 86c and 95c respectively.
The FN Arena database shows Bank of Queensland is rated as Buy once, Hold five times and Sell twice, with an average price target of $14.69. The median price target according to Thomson One is $15.00.
Bank of Queensland shares today are slightly higher in line with the stronger market, at $11.25 the stock trading up 6c at $14.01.