Australia | Mar 12 2008
By Chris Shaw
At least some investors are seeing value in the Australian equities market at current levels as yesterday saw not only Incitec Pivot ((IPL)) bid for Dyno Nobel ((DXL)) but a takeover offer for Challenger Infrastructure Fund ((CIF)) by 19% shareholder Arkmile.
While the bid is only indicative and non-binding it makes sense according to UBS, who sees the stock as a good restructuring target given its stakes in assets such as Arqiva, North Gas and Southern Water would be relatively easy to sell.
With bid details scarce the broker retains its Buy rating, which is based on its valuation for the stock of $3.70, which it notes is broadly in line with management’s valuation of $4.05 when adjusted for management fees. Merrill Lynch takes the view the offer being pitched below this valuation means it has little chance of succeeding, suggesting it may actually be an attempt to put a floor under the share price rather than a serious attempt to gain control of the company.
As with Merrill Lynch, JP Morgan continues to rate the stock as Neutral but suggests if a proper bid was to emerge it would represent a good outcome for shareholders given there is currently a lack of positive catalysts for the stock.
Supporting its view, the broker suggests there remains a chance a capital raising would be required to bring gearing down from its current level of 76% (as at December 2007) given there remains $225 million in redeemable preference shares outstanding relating to the Southern Water transaction last year and there has yet have been no assets sales as recently flagged by management.
ABN Amro disagrees and regards the offer as opportunistic given recent share price weakness, which as Citi noted in its review of the fund’s profit result last month was likely due to the exposure to a slowing UK economy. ABN Amro continues to recommend the stock as a Buy and suggests shareholders retain their exposure at present to see if and how the offer plays out while Citi’s Buy rating has not been updated since its review of the profit result.
Deutsche Bank also retains its Buy rating but suggests it may be difficult for Arkmile to actually fund the proposed purchase given Challenger Infrastructure’s gearing level and the fact it has only just enough cash to cover its distributions.
Post the news of the bid the FNArena database shows Challenger Infrastructure scoring five Buys and two Hold ratings, with an average price target essentially unchanged at $3.83. Shares in the stock today are weaker despite a stronger overall market and as at 3.00pm were down 9c at $2.89.