Citi Not Buying The Foster’s Attraction

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

By Chris Shaw

Bank of America Merrill Lynch yesterday suggested Foster’s Group ((FGL)) was now a buy as the market was undervaluing the company, but Citi has today come out in disagreement, the broker downgrading the stock to Hold from Buy based up the the view that any turnaround in the group’s fortunes is likely a prove a two to three year process rather than anything shorter-term.

Citi’s argument against the stock is while operational changes and cost cutting measures are a positive, the benefits are likely to be limited given the tough operating environment at present. The analysts point out the beer market overall is becoming more competitive leading to some loss of market share for the company. On top comes the fact that making money in wine is still difficult given persistent margin pressures.

To reflect its view the broker has cut its net profit after tax forecast for FY09 by 3.5% to $735.6m, which implies earnings per share (EPS) of 38.2c for the year. This is expected to increase to 40.5% in FY10 and 42.4% in FY11. These estimates compares to Bank of America Merrill Lynch estimates of 39c, 45c and 54c respectively, highlighting how far apart the two brokers are with their numbers.

Consensus estimates according to the FNArena database are 38.7c this year and 41.6c in FY10. Market consensus for FY11 is currently at 45c. This suggests analysts elsewhere seem on the side of Citi when it comes to FY09 and FY10, but they switch to BA-ML from FY11 onwards.

In answer to the potential for the company to be an acquisition target, Citi acknowledges such a result would likely yield a price of more than $7.00 per share, but Citi suggests such a deal is unlikely to happen within the next 12-18 months. Given the length of lead time in any such deal the broker takes the view there is better value elsewhere in the sector, with Coca-Cola Amatil ((CCL)) one example. The broker rates Coca-Cola Amatil as a Buy, upgrading the stock today from its previous Hold recommendation.

Post Citi’s downgrade Foster’s is rated as Buy twice, Hold six times and Sell twice, with an average target of $5.64. In line with its rating’s downgrade Citi has cut its target to $5.60 from $5.70. Shares in Foster’s today are stronger again and as at 2.15pm the stock was up 9c at $5.33.

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