Investment Matters

What matters this week: Fairfax, Oroton, Coca-Cola, Wesfarmers.

TPG, the private equity player of Myer fame (or should that be infamy) beavered away over the weekend, and decided to up its offer (non-binding and conditional) for Fairfax Media.  The revised bid is $1.20 per share for the entire business.  Their last bid - for the parts of Fairfax they wanted including Domain and the three metro mastheads The Age, SMH and AFR - was $0.95 per share.  Other parts of the business, including Stan, NZ publishing and the regional papers, were excluded previously.  One could, perhaps cynically, consider this two stage approach as quite a clever negotiation ploy - setting an expectation in the minds of shareholders (and others) that there are some quite worthless parts of Fairfax, that should not have much value attributed to them.  Thus, then get them for a discounted price.

However, their ploy may be shown up, with a rival takeover proposal (non-binding and conditional) emerging late in the week from Hellman & Friedman, also private equity.  Their cash bid is $1.225 to $1.250 per share.  Fairfax is going to allow both firms to conduct due diligence.

Retailer woes continued this week.  Oroton went into trading halt Monday, in anticipation of another downgrade. As background: it only downgraded four months ago, to then guidance for H1 FY-17 earnings before interest, tax, depreciation and amorisation [EBITDA] of $4.5m to $5.0m - not long before it announced it did achieve $5.0m EBITDA for that half (ending 28-Jan-17).   This compared to EBITDA of $12.9m for FY-16.

And when it did start trading again on Wednesday it was ugly to say the least - a 19.6% fall, because EBITDA has been further revised down to $2m to $3m for the full year of FY-17 (oh dear!) - on the back of lower sales volumes, increased losses from their GAP business, and foreign exchange impacts.

Coca-Cola Amatil held its AGM this week, during which the Managing Director noted the challenging conditions in Australia (as Oroton is experiencing), along with structural adjustments in the market.   But one thinks the latter is the most significant and foundation rocking for Cola Cola - people consuming a lot less sugar.

Wesfarmers' proposed split off and IPO of Officeworks was in the press this week.  Concern exists about the potential pricing of the IPO (being too high), and the timing - given Amazon's entry into Australia is getting closer.

There was some good news this week, other than Fairfax.  In contrast to discretionary retailers, companies with a face towards the housing market are bubbling along quite nicely.  DuluxGroup released their result for the half ending 31-Mar-17.   Net profit increased 9.3% as compared to H1 FY-17, to $69.6m (excluding a tax related one-off gain).

James Hardie's Q4 release also delivered good profit growth - FY-17 profit (excluding such things as asbestos related expenses, asset impairments and other one-offs) grew from US$243m in FY-16 to US$249m in FY-17, which was very slightly below consensus expectations.  The market punished the stock though, based on concerns about the outlook for the US and Australia housing markets.

Orica, provider of explosives for mining, quarrying, oil and gas and construction markets, released its results for the half year ending 31-Mar-17.  It delivered reasonable (underlying) profit growth: US$195m vs $190m pcp.  Orica indicated it has seen some normalisation of mine plans, but expects that this will continue gradually - which leads us quite nicely into...