Jason Lindsay, at First NZ Capital, has raised his 12-month target valuation for Contact Energy from $7.85 to $7.95, factoring in a likely $600 million capital return to shareholders.
Analysts have been tipping such a return for several weeks now. In the wake of the failed Origin takeover bid, Contact's balance sheet is strong and a big build-up of imputation credits has to be dealt with. If it continues on its present path, it could be debt free by 2012. Of its capital expenditure plans, only the construction of the Otahuhu C power station would have a material impact.
Lindsay estimates that even if the company proceeds with Otahuhu C its debt-to-debt-plus-equity ratio would be 23 per cent - relatively conservative by international standards. That would leave scope for the return of capital and reduce the weighted cost of capital.
The big questions then is how much? And how to do it?
Lindsay argues the two most likely scenarios would be a pro-rata share cancellation, where a portion of shares are bought by the company and then removed from the market to boost the value of those remaining, or an off-market share buyback. Both achieve the same outcome but the large number of small shareholders on the register probably makes a share cancellation the better option.
Tax issues make a figure of at least $600 million (about 15 per cent of market cap and just over $1 a share) look likely. Anything less would probably be considered a dividend for tax purposes. Contact shares closed down 7c at $7.25 yesterday.
TV stars ...
Some negative data out in the past month on TVNZ's audience figures and advertising rates has prompted Rodney Deacon, at Goldman Sachs JBWere (the firm behind the Canwest float), to take a fresh look at the prospects for listed media companies Sky TV and Canwest MediaWorks. He writes TVNZ's losses represent gains for Canwest's TV3 and Sky's Prime channel that, despite the wider slowdown in advertising, could still experience an improvement to group earnings.
TVNZ disclosed last week it was dropping its peak time advertising rates by about 14 per cent for TV1 and 1 per cent for TV2 compared with the same period a year earlier. Industry insiders are tipping the Canwest rate card - due any day - won't have been hit nearly as hard and may even raise some prices.
It has also been disclosed TVNZ's audience for both channels fell in the third quarter while TV3's audience remained static and Prime's rose sharply. All of this is good news for the listed media companies. Although investors are likely to remain wary of the sector due to the wider industry slowdown some good buying opportunities exist for those prepared to look beyond this economic cycle.
Canwest, in particular, is likely to see some significant value growth if the advertising environment picks up next year. Deacon is sticking with his "buy" recommendation on Canwest, giving a valuation of $2.01.
Its shares closed steady at $1.49 yesterday.
He has maintained his neutral stance on Sky TV and his valuation of $5.89. The shares closed unchanged at $5.60 yesterday.
Sky delivered a disappointing result for 2006 (a net profit of $60.2 million, down 19.2 per cent). And while the acquisition of Prime is likely to bear fruit, there are some concerns about subscriber growth, given unknown factors such as the deregulated telecommunications market and the arrival of the state-funded digital platform, FreeView.
Marching on
After a slow start, which prompted a 10-day deadline extension, Graeme Hart's Rank Group, is now on a roll in its full takeover bid for Burns Philp. It had secured 74.45 per cent of the company by yesterday and the Hart team now looks odds on to be popping the champagne next Friday when the bid is due to close.
Nice call
While a procession of business opinion surveys shows optimism increasing, economists - who have predicted at least seven of the last three recessions - are still talking doom and gloom for 2008.
Meanwhile, the NZX continues to chug onwards and upwards. If you exclude the politically damaged goods of Telecom from the equation, then the NZX-50 is up by nearly 18 per cent so far this year.
There are still 10 weeks left in 2006 but it's already looking safe to give Wellington broker Ian Waddell a pat on the back for his February Stock Takes prediction - that despite pessimism about the economic outlook the market would deliver good returns thanks largely to takeover activity.
At the time, there were just a few small takeovers and the tail end of Carter Holt Harvey on the go. But since then, we've seen Gullivers, Waste Management, 42 Below and The Warehouse.
"There are parallels with the markets in 1983, 1984 and 1985," Waddell said at the time. "Only instead of Chase and Equity Corps, it's all the private equity groups."
Let's hope there are no parallels to 1987 next year.
Coded message on Air New Zealand's transtasman tie-up
The importance of the proposed transtasman code share has attracted plenty of media attention in the past few months. Although he isn't downplaying his desire to see it approved by regulators, Air New Zealand chief executive Rob Fyfe is concerned that its financial significance is being overplayed in the market place.
For example, the agreement - which could potentially shift Air New Zealand's earnings on the Tasman from negative to positive - represents just a fraction of the value that could either be created or destroyed by the airline's new Shanghai service, he says. That new service represents an investment of about $150 million a year.
"If that doesn't work we could chew through a huge amount of revenue and put a really big hole in a business that reported a net profit, after-tax $100 million this year," Fyfe said this week. The new Hong Kong-London route represents a $300 million investment and there is the issue of more than US$1 billion of new planes arriving soon.
Air New Zealand is expecting to get code-share decisions from the ACCC in Australia in December and the New Zealand Commerce Commission early next year. If it gets the nod it will start operating soon as both airlines are proceeding with the groundwork.
Meanwhile (as is so often the case), the airline's shares rose yesterday on news that the company may outsource more than 1600 airport services jobs. The shares closed up 2c at $1.41.
Cow power
Power companies Transpower and Meridian are rapidly joining the ranks of New Zealand's big corporate dairy farmers. In annual reports issued this week, they reveal sizeable stakes in Fonterra - a by-product of land purchases.
Meridian holds Fonterra shares worth $9.13 million. Transpower has four dairy farms but has taken ownership of shares from only one - equivalent to about $400,000.
In a symmetrical twist, Fonterra owns its own power generators which, during the off-season, sell electricity to the national grid.
The power companies would be prime candidates for freeing some of that cash by selling rights on their Fonterra shares to listed company Dairy Equities.
After raising $92 million in a high-profile float last month, Dairy Equities has stalled.
It has been stuck on 48c - 2c below issue price - since October 3, and the number of daily trades is down in the double digits most days. The company plans to buy the rights to farmers' future earnings from Fonterra's value-added business. But farmers haven't leaped at the opportunity, and only $2.2 million has been spent. The company hopes it might get more takers when the dairy season ends, but that isn't till May.
<i>Stock takes:</i> Cash back
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