Australia | Nov 28 2006
By Greg Peel
The Cole Inquiry was never going to be about telling the government how Australia’s wheat industry should be run. It was all about deciding if there was a bribery case and, if such, at whom the blame should be directed.
On the surface, thus, AWB (AWB) has appeared to have escaped fairly lightly. As the bulk of the blame is directed at company executives, all of whom have now been sacked, the company itself is breathing a lot easier in only being docked about $8m for its indiscretions. Things could have been a lot worse.
The government has also escaped scot-free, resulting in the relevant ministers now strutting around like a bunch of prized cocks. What a marvellous spin on arguably Australia’s most embarrassing global corporate incident, which occurred on Howard’s watch.
However, the stock market is not interested in the cabinet’s post-Inquiry gloating. It is most interested in what will become of AWB now, and what, if anything, will happen to AWB’s single desk monopoly. On that front, the signs are very bad.
For months now brokers have run two valuations for AWB – that which assumes AWB maintains its monopoly, and that which assumes it doesn’t. The difference is critical, as it means a spread of target prices from around the $4.00 mark to around the $2.00 mark.
It wasn’t Cole’s job to make the decision, so the Inquiry recommended no more than to suggest if AWB were to retain its monopoly, it must do so under significantly increased regulation and monitoring from the government. It was bad enough that the government privatised a monopoly in the first place, but to allow it to stand with further strict controls would be ludicrous.
Moreover, JP Morgan makes the point that the government is looking to reduce its level of involvement in AWB, not increase it. Telstra is testament to such a policy as well. To that end, JP Morgan analysts assume the government will likely move to partial or full deregulation of the industry.
Those views are echoed by Macquarie analysts, who note that the prime minister has already dropped the hint that changes to the current wheat marketing arrangements will be made.
Adding pressure is the US, which has strongly crticised the government for allowing the monopoly in the first place. What ever the US wants it gets, so one would have to assume it will get a deregulated market. In the meantime, the US will maintain farm subsidies that ensure the third world always stays that way, and will have the opportunity to make inroads into Australian wheat marketing. All backed by the knowledge that there have never been any corrupt activities perpetrated by US companies in Iraq.
Loss of the single desk will be a defining blow for AWB, but its troubles will not end with the Cole Inquiry. JP Morgan notes the $8m in fines imposed by the Inquiry equate to a mere $0.025 per share, but a potential Australian Tax Office assessment could still lead to reductions worth $0.73-93 per share.
Then there will be probably years of litigation, as aggrieved minor parties line up to get their cut, and a possible US Senate inquiry, which could go anywhere. Perhaps the guilty executives will be sent to Guantanamo Bay.
In recent months the AWB share price has traded around the middle ground between the winning and losing scenarios (adjusted for the drought). Macquarie won’t stick its neck out, but it has alluded to Howard’s statements and put forward a monopoly loss target price of $1.94. JP Morgan won’t commit either, but it suggests investors sell into any short term share price strength.
Three of five brokers and researchers in the FNArena database have chosen not to speculate further at this point, and the four Hold recommendations from brokers reflect the either/or positioning. The average price target is $2.99, which is pretty much in the middle ground as well.
Aspect Huntley’s current rating is Avoid, which seems a very sensible attitude.