Foster’s Under Downward Pressure

This story features FRUGL GROUP LIMITED. For more info SHARE ANALYSIS: FGL

By Chris Shaw

The wine division has been a problem for Foster’s Group ((FGL)) since it acquired Southcorp years ago, but as RBS Australia points out in its latest note on the company, a strengthening Australian dollar in combination with higher costs plus a trend of consumers to trade down in terms of prices means earnings from the division should remain under pressure for some time to come.

The broker notes the trading down trend continues to put margins under pressure, especially given the group’s poor channel mix and the fact both retailers and distributors are currently destocking given lower sales in the economic downturn. As recently noted by Silicon Valley Bank (see US Wine Industry Is Doing It Tough, 15/5/09), the current weakness in the demand side of the US market means any turnaround in margins is unlikely in the medium-term.

The currency impact is no small matter either as on RBS Australia’s numbers the Aussie dollar’s gains against the US dollar in this quarter alone could knock around $13 million from earnings in the current half year, so to reflect this the broker has cut its earnings forecasts by 1.8% this year and by 1.4% in FY10.

In earnings per share terms this leaves the broker forecasting outcomes of 38.4c this year and 41c next year. Consensus estimates according to the FNArena database currently stand at 36.5c and 37.2c respectively for FY09 and FY10.

Despite the changes to its numbers, the broker retains its Hold rating and $5.50 price target, which is almost exactly in line with the average target according to the database of $5.55. Overall, the stock is rated as Buy just once, Hold seven times and Sell twice.

One of the Sell ratings comes courtesy of JP Morgan, the broker offering virtually identical arguments to those of RBS Australia in justifying its rating as it suggests under such conditions as prevail at present there is little scope for the stock to outperform anytime soon.

In contrast, Credit Suisse has an Outperform recommendation on the stock in part because it sees it as a potential takeover target, though it conceded recently current arbitration could remove Modelo as a possible buyer if its court case against Anheuser Busch is not resolved favourably. Regardless, the broker sees enough value to retain a positive view, supported by its $6.15 price target.

Shares in Foster’s today are slightly stronger despite a weaker overall market and as at 1.10pm the stock was up 6c at $5.11. This compares to a range over the past year of $4.26 to $6.17.

Click to view our Glossary of Financial Terms