Small Cap Monitor:

No Beef Deal For FCL, ACC

Shares in Futuris Corporation and its 43% owned associate, the beef producer Australian Agricultural Company, fell sharply yesterday after Futuris’s announcement that it had terminated the process to sell its AACo stake

That was a decision which came as a surprise to investors and brokers, but not if you look at the accompanying story on the optimistic outlook for rural Australia, including beef farmers, from the Australian Bureau of Agricultural and Resource Economics.

Beef farmers are expecting a significant rise in returns and many will make a profit as the drought ends in some regions (especially Central and Northern Queensland).

But that information was missed by nervy investors who sold off Futruris shares by around 12% at one stage and AACo by about the same amount as well. Futuris (FCL) shares ended at $1.87, down 11.3% and AACo at $2.84, down 9.3%.

The CEO of Futuris, Les Wozniczka, called a conference call with analysts late yesterday to try and better explain the decision.

Futuris announced at its AGM, after the market had closed on Tuesday that it had terminated the sale process. Despite significant interest in the AACo stake, none of the proposals arising from the sale process had certainty of execution or timing.

Futuris also provided market guidance that underlying earnings before interest and tax for the 2008 full year would be at the upper end of analysts’ forecasts of $154 million to $183 million.

The company said full year underlying profit was expected to be around $100 million, depending upon continued good rainfall and sales of managed investment schemes.

“Achievement of these projections would represent Futuris’ strongest-ever six month operational performance,” FCL said on Tuesday.

“These expectations are predicated on continuing good rainfall and MIS sales. We are also expecting a positive mark-to-market in AACo’s result in the six month period 30 June 2008.”

That means that unlike the last year or so FCL is expecting the value of the AACo herd to rise because of rising prices.

AACo said in a separate statement that “Market recognition of the strategic and capital value of basic food production operations and agricultural land has increased significantly since the divestment proposal was announced. This climate is expected to be beneficial for AACo.”

That’s a reference to the surge in food prices in recent months.

But Goldman Sachs JBWere said yesterday in a research note that it had expected that proceeds from the sale of the AACo stake would have been used to retire debt.

“The termination of this sale process means we now expect a higher debt position going forward and hence a higher interest charge, Goldman Sachs said.

“We were expecting proceeds from the sale of AAC to be used to retire debt. The termination of this sale process means we now expect a higher debt position going forward and hence a higher interest charge. This more than offsets the impact of AAC earnings being brought back above the line (at the 1H08 result FCL indicated AAC earnings would be treated as an NRI below the line given its decision to sell the investment). He said Futuris’s expectation of an underlying profit of around $100 million was below the analysts’ consensus forecast of $105 million.”

In its update to shareholders, FCL said:

“Trading results in the 4 months to 30 April have seen vigorous recovery by Elders Rural Services, driven largely by crop-related merchandise sales and further growth in income from grain accumulation and trading operations.

“A good seasonal break has occurred in Western Australia and parts of South Australia with further rainfall expected. Cropping activity is well underway in these regions and is being reflected in accelerated merchandise sales. These trends are expected to become well established in the eastern states in the coming weeks as rainfall spreads.

“Livestock operations are experiencing lower levels of activity and income as postdrought restocking occurs. The consequent increase in herd numbers will benefit trading in subsequent periods. In wool, agency operations are trading in-line with the previous year, but downstream operations are being impacted by the effects of reduced discretionary spending in major economies.

“Real Estate continues to perform well despite recent interest rate rises reducing sales activity.”

IAG Downgraded.

Insurance Australia Group is still rejecting the $8.0 billion proposed takeover “offer” from QBE Insurance, despite being downgraded by Standard & Poor’s.

IAG said the rejection of the QBE offer was being maintained, despite the downgrade, revealed yesterday.

IAG shares dropped one cent to $4.35 while QBE shares fell to $25.24. That left the QBE offer of 0.142 QBE shares and 70 cents cash worth $4.28.

S&P cut IAG’s rating on IAG to ‘A+’ from ‘AA-’ and cut the ratings on IAG’s wholly-owned insurers to ‘AA-’ from AA.

IAG shrugged off the downgrade.

“The group continues to maintain a very strong balance sheet and our key wholly owned insurers remain the highest rated of any Australian-based general insurer,” IAG Chief Financial Officer George Venardos said in a statement.

S&P said IAG had raised prices and was looking to cut costs and restructure to improve its earnings performance and financial position.

“While these initiatives are positive, their full impact is likely to take some time,” S&P said in the ratings announcement.

IAG’s board rejected QBE’s suggested “offer” of 0.142 shares plus 70 cents last month; IAG cut its profit outlook last week and QBE extended its “offer” on Tuesday to May 19 to give IAG shareholders time to weigh up the impact of the earnings downgrade.

The IAG statement to the ASX revealing the downgrade was strangely reluctant to use a worth like ‘cut’ or ‘downgrade.’

Insurance Australia Group Limited (IAG) has today been informed by Standard & Poor’s (S&P) that its key wholly-owned licensed insurers would retain ‘very strong’ counterparty credit and financial strength ratings. The ratings will change from ‘AA’ (Watch Negative) to ‘AA-’ (Stable).

The holding company’s rating has changed from ‘AA-’ to ‘A+’ (Stable).

The change concludes the CreditWatch process announced by S&P following the release of IAG’s half year results on 29 February 2008.

IAG Chief Financial Officer, Mr George Venardos said that although the Group’s ratings have changed by one notch, the new ratings for the wholly-owned insurers remain ‘very strong’, confirming the strength of IAG’s balance sheet and capital position.

“S&P has acknowledged the consistency of IAG’s prudent reserving methodology, the strength of our reinsurance program and the actions management is taking to improve the profitability of the business as the insurance cycle recovers,” Mr Venardos said.

“We also continue to work with S&P to try to get to a closer alignment between our internal model and S&P’s generic industry model as we believe IAG continues to hold ample capital to meet the risk tolerances required by S&P for a ‘AA’ rating. The internal model we use is tailored to our business and considers all of our specific business risks.

“The Group continues to maintain a very strong balance sheet and our key wholly owned insurers remain the highest rated of any Australian-based general insurer.”

The downgrade isn’t dramatic, but it will cost IAG more money in the medium term.

But a downgrade is a downgrade, regardless of how you pitch it.

QBE has two months to make the “offer” formal by documenting it and turning it into an actual irrevocable deal. There is around a month to go.

This Information is provided to you by the Australasian Investment Review (AIR).
Subscriptions are free at www.aireview.com.au

AIR reports about financial markets and investment products in the widest sense possible. The AIR website and all its contents is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before making any investment decisions.



Australand Reiterates Earnings Guidance

Developer Australand Property Group (ALZ) has reaffirmed its earnings guidance for calendar 2008, despite challenging conditions in the property sector and volatile credit markets.

Australand has forecast growth in operating earnings per stapled security of between 2% to 3% per year.

In the group’s annual general meeting held today, Australand managing director and chief executive officer Robert Johnston addressed the market conditions and the company’s strategy to capital management.

“The recent credit crunch and reduced liquidity in the market has heightened the level of focus on debt from investors and analysts, and in particular look through gearing,”

“The availability of credit has heightened and associated costs have increased significantly as risk is re-priced.

“While Australand has no direct exposure to the US sub-prime mortgage crisis, there is no doubt that the operating environment has become more challenging with increased financing costs and weaker business and consumer sentiment,” he added.

Johnston said the company had no major debt facilities that needed to be renewed in 2008 and had undrawn facilities of $170 million at the end of 2007.

The group reported an operating profit after tax of $163.2 million, an increase of 5% on the prior year.

The Commercial and Industrial business delivered an outstanding result with an operating profit before tax of $70.1 million, up 75% on the 2006 result.

The Investment Property business also performed strongly, achieving a profit after tax of $106.7 million, representing an 11% increase on the prior year.

Earnings per stapled security increased 2% from 17.3 cents to 17.6 cents.

The group said it plans to expand into the Asian market as one of its growth strategies as well as growing its funds under management.

Shares in AZL gained 5 cents to $1.64.



Fisher And Paykel Axes 740 Jobs

Home appliances business, Fisher and Paykel (FPA) announced today its decision to axe 740 jobs in Australia and New Zealand as part of new strategy.

The New Zealand based group is closing its Brisbane plant as part of a strategy to relocate production operations to Italy, Thailand and newly acquired refrigeration plant located in Reynose, Mexico.

The move is expected to realised a benefit of approximately $50 million per annum. The funds used from the sale of the current properties will be used to facilitate the move.

The Range & DishDrawer factory in Dunedin, New Zealand, along with the refrigerator plant in Brisbane and the DCS cooking factory in California, USA will all be relocated over the next 12-18 motnhs.

Fisher and Paykel said the remaining production facilities in Auckland and Italy will not be affected.

John Bongard, Fisher & Paykel Appliances CEO and managing director cited ongoing manufacturing cost escalations, particularly in New Zealand and Australia, as the main reason for relocating production.

“We have been faced for many years with an extremely unhelpful exchange rate fuelled by high interest rates. Increasingly complex and costly compliance costs in manufacturing in our home countries have not assisted.”

“On top of these factors, free trade agreementds with low cost labour countries like China and Thailand have created a playing field we are unable to compete in,” said John.

Shares in FPA surged 13% on the news. as the extra saving for the company signify more value for investor.

This Information is provided to you by the Australasian Investment Review (AIR).
Subscriptions are free at www.aireview.com.au

AIR reports about financial markets and investment products in the widest sense possible. The AIR website and all its contents is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before making any investment decisions.




	
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