KEY POINTS:
The two listed companies which upgraded their earnings outlook last week both received takeover offers this week.
Dental software group Software of Excellence upgraded its earnings outlook last Thursday, lifting its net profit forecast to $4.3 million from $3.85 million. On Monday trading was halted while news of a conditional bid by an unnamed buyer was released.
Also last Thursday Tourism Holdings increased its after-tax trading profit forecasts to between $17.5 million and $18.5 million - up from the previous predictions of $15 million to $18 million. Then on Monday it announced a takeover bid from ASX listed MFS Living and Leisure at $2.80 a share.
Interesting timing.
Still if someone was coming round to make an offer on your car, you'd want to give it a bit of a polish wouldn't you.
Tourism Holdings shares closed at $2.73 yesterday. Software of Excellence closed at $2.72.
Woolworths lynched
As reported in Stock Takes last week, Merrill Lynch - which has been linked to UK retailer Tesco - has been in town assessing the local grocery scene.
Merrill Lynch's Sydney-based research team has produced a report which comes to some bold conclusions about the New Zealand market.
The report is highly flattering of the Foodstuffs co-operative. Merrill Lynch analysts have rated it the best example of a co-operative business they've seen (sorry Fonterra). They also say Foodstuffs is providing Woolworths (which owns the rival Progressive chain) with the toughest competition it has faced in any business. Wow.
Citing examples of the speed with which Foodstuffs has responded to match or better proactive pricing moves by Progressive, the report concludes that Woolworths could not win a price war with Foodstuffs.
And despite Woolworths' best efforts, Foodstuffs continues to gain market share, it says. Foodstuffs is dangerous because it has a unique, "patriotic, highly efficient and almost family-like" ideology which is difficult for Woolworths and its equity analysts to fully understand, the report concludes.
Apart from the faintly patronising tone (Foodstuffs comes off as some sort of hardy barbarian tribe that will never bow to the Roman Empire) it's glowing stuff.
The report portrays the co-operative's position as so strong that it is probably the last thing Foodstuffs management needs the Commerce Commission to be reading right now as it fights for the right to buy The Warehouse.
There are still growth prospects for Woolworths in New Zealand - but only if it stops trying to beat Foodstuffs on price, the report says.
The analysts also make the case for Woolworths being a likely buyer of The Warehouse - but we already knew that.
So, where does all this leave us on the The Warehouse sale prospects?
The Australian newspaper has reported that Tesco is now a serious contender for at least parts of the Coles empire. There's been no denials and if correct it seems reasonable to assume that Tesco would also look seriously at The Warehouse.
In relative terms it's not a huge purchase ($22 billion plus for Coles vs $2 billion or so for The Warehouse). And the distribution synergies would make a double buy compelling.
Tesco has also been linked to Woolworths with the assumption that Woolworths might buy the general merchandise parts of Coles (which wouldn't attract the ire of competition regulators) and Tesco would take the grocery.
Of course, a research report by the Merrill Lynch broking team doesn't equal proof of interest from the Merrill Lynch investment banking team.
But what it does mean is that the local market is now exciting enough to warrant a rare foray across the Tasman by Australian analysts.
The Warehouse shares closed down 1c at $6.95 yesterday.
Airport stocks defy dollar's drag
A look at the top-performing stocks for the year so far shows Air New Zealand still leading the pack with returns of 61 per cent. Tourism Holdings is now second after the takeover offer this week - up 41 per cent. Michael Hill continues its strong run up 39 per cent.
But most interesting is the strong performance of Auckland International Airport, which hit a record high of $2.63 yesterday (it closed at $2.61) despite the fact that the high dollar is largely a negative for the company as it is likely to dampen foreign visitor numbers. The stock has delivered returns of 22 per cent for the year to date.
Goldman Sachs and Macquarie are understood to have been big buyers in the past few days.
A possible reason for the surge in buying is a belief that the airport may be about to spin off some property assets in a listed trust to take advantage of the portfolio investment entity (PIE) tax changes kicking in on October 1.
Conventional wisdom would suggest three key factors holding sway over AIA shares. The dollar, which has moved unfavourably in the past six weeks, is a negative.
That is offset slightly by the strong growth of AIA's biggest customer, Air New Zealand, which is increasing passenger numbers with the addition of new routes such as Vancouver and Shanghai.
The airport's new price regime - due to be in place later this year - is another positive. It is almost certainly going to mean an increase in revenue although how much of a jump is still to be determined. There are those who believe the airport cannot afford to push prices up too much or it risks copping a new regulatory regime from the Government.
Another positive factor is the market enthusiasm for infrastructure stocks, considered a safe bet by those who fear the long bull run may be drawing to an end.
But none of these explains the recent sharp surge.
An independently listed property subsidiary makes a lot of sense. Property management provides a sizeable revenue stream for the airport and the tax changes will be lucrative for listed property trusts.
Stocks such as Kiwi Income and and AMP Property Trust have already risen this year as the positive benefits of the change have been factored in.
Listed property entities will get a tax-favourable status as portfolio investment entities. Taxpayers now have to pay additional tax on dividends from property trusts.
But under the proposed changes, the investors' tax rate will be capped and could be the same as the property entity's tax rate. Most entities have tax credits and pay well under 33 per cent tax.
Tourism takeover
Valuations of Tourism Holdings were all over the show prior to the $2.80 per share takeover offer from MFS Living and Leisure this week. But they had one thing in common - no one thought it was worth $2.80.
Just last week Goldman Sachs JBWere had the value as low as $1.90 but following the profit upgrade yesterday it revised its view to $2.10.
Forsyth Barr's Rob Mercer was most optimistic with a pre-offer valuation of $2.58 (he has raised that to $3.17 this week).
ABN Amro's David Oxley had it at $2.09 prior to the bid but has now upped that to $2.80.
UBS and First NZ have also both raised their valuations to $2.80 in the wake of the bid.
The success of the takeover ultimately hinges on the response of US private equity consortium Sterling, Drake and Associates. They hold a 20 per cent stake which they have been steadily building for the past 12 months. Buying by the consortium prompted Stock Takes to speculate on the prospect of a THL takeover last year.
Presumably the US grouping had identified THL as an undervalued company but whether they were planning a bid of their own or whether they were just counting on an offer like this one emerging remains to be seen. Investors clearly don't rate the chances of a rival bid emerging. THL shares closed up 2c at $2.73 yesterday.
Dollar downgrades
Goldman Sachs JBWere has made some more currency related downgrades to two more export stocks. Pumpkin Patch and Cavalier Corporation both get their 2008 earnings forecasts dropped by about 4 per cent in a note by analyst Rodney Deacon.
Revising his forecasts to reflect Goldman's latest currency projections, Deacon drops the 2008 Pumpkin Patch profit forecast to $38.3 million. He also drops the 2009 profit forecast by 2 per cent to $46.8 million.
His valuation drops slightly to $3.91. That's because his model runs forecasts all the way out to 2020 and the currency revisions impact only on the next three years.
However, Deacon also retains a long-term "buy" recommendation on the stock and it closed up 13c at $4.48 yesterday.
Any short-term weakness should be seized as a long-term buying opportunity, he writes.
Cavalier has its net profit forecast for 2008 lowered 4.5 per cent to $215.9 million and 2009 dropped by 1.9 per cent to $16.9 million. As well as the dollar, Cavalier still faces challenges from weakness in the New Zealand market, he writes.
Deacon values the stock at $3.08 and rates it as a "hold" long term.
Cavalier shares closed up 12c at $3.20 yesterday.