Stock takes: Singapore sling

Singapore-based food multinational Olam International bought a 14.35 per cent stake in NZ Farming Systems Uruguay this week. One of Stock Takes' sources who had involvement with Olam when it paid $101 million for a 24.99 per cent stake in Open Country Cheese last year reckons Olam's intention may well be to move to a controlling stake.

The S$1.67 billion ($1.71 billion) company, whose second largest shareholder is the Singapore Government's investment vehicle Temasek, is gearing up with a S$400 million convertible note issue to fund acquisitions.

"Olam is now very well positioned financially to move forward on its strategic objectives, allowing us to continue building on our leading competitive position in an attractive industry with strong growth prospects," chief executive Sunny Verghese said recently.

Olam went on to try to take over Open Country following its acquisition of an initial 20 per cent stake but was blocked by Talley's. Stock Takes understands the two have now developed a good working relationship.

"With this it's going to be a walk in the park."

Our source believes it makes sense for Olam to target PGG Wrightson's 11 per cent stake given Wrightson's current position means it will probably have to sell assets to help repair its balance sheet. In fact the source also believes Wrightson is looking for buyers for its finance company business.

The acquisition of Wrightson's stake would trigger a compulsory offer for at least 50 per cent of the company.

"Clearly they've taken the opportunity with Wrightson in total disarray and needing to raise capital and RPI being in very deep trouble to buy into the production and land side at a very cheap price."

NZ Farming Systems' shares have continued to rise since the Olam purchase and added another 2c yesterday to close at 48c against Olam's acquisition price of 41c a share.

BOTTOM LINE

A couple of months back the Government said it expected the banking sector "to take on a greater role in sharing the burden of the current recession" amid concerns the majors were padding margins on variable rate loans.

At first glance the third quarter General Disclosure Statements published this week by ANZ National, BNZ and Westpac would suggest they are.

ANZ National's net profit for the nine months to June was $478 million, down 43 per cent on a year earlier or $561 million, down from $960 million according to whichever of its General Disclosure statements you look at.

BNZ posted a $183 million loss against last year's $597 million profit and Westpac's profit was down from $462 million to $186 million.

The massive falls in bottom line figures are largely due to big provisions for bad debts and in BNZ's case for its $661 million "structured finance" tax bill.

But the banks have not actually "lost" this cash, it's been set aside to cover potential losses. In many cases the banks will hold security over impaired loans so their eventual losses may be far less than the provisioning suggests.

BNZ chief financial officer Ken Christie tells us the real bottom line as far as comparing loan losses across banks is the amounts written off.

As a proportion of gross loans and advances as at June 30 BNZ wrote off 0.11 per cent, ANZ National 0.18 per cent and Westpac, which reported the heftiest bad debt charges at $515 million, wrote off 0.10 per cent.

BANKING ON SAM

One of Stock Takes' colleagues was surprised when Kiwibank chief Sam Knowles, before the Opposition's gummy but sporadically interesting banking inquiry this week, appeared to defend his big Australian-owned rivals against accusations they were "rorting" their New Zealand customers. After all, Kiwibank, if only in a tongue-in-cheek fashion, trades on nationalistic antagonism towards our financial overlords.

But former ANZ executive Knowles is a seasoned banker and his reluctance, Kiwibank's advertising aside, to join in with the inquiry's bashing of his former colleagues to whose ranks he may well one day return, looks cool-headed and pragmatic. Kiwibank's success, although arguable to some extent, speaks for itself and is no doubt due in large measure to Knowles' abilities.

Kiwibank is a minor but nonetheless valuable constraint against the flow of banking profits out of this country. The extent of that flow was illustrated vividly when "serial entrepreneur" Selwn Pellett, appearing before the inquiry on behalf of his think-tank the Productive Economy Council, pointed out "the top four banks continue to make more profit than the rest of the NZX-50 put together".

WAREHOUSE WILTS

Shares in The Warehouse have lost ground over the past couple of weeks and while we've not sighted them ourselves, a local fund manager says there are research notes out "with analysts hosing their numbers down a bit" ahead of the retailer's full-year result in a week's time.

"People are anxious about what's going to come out in terms of the outlook statements and how strong those numbers are.

"Has the retail activity that others have had converted to the Warehouse or has it underperformed?"

In a May trading update, the company said third quarter sales were down 2.8 per cent on last year's corresponding period although last year's figures included now discontinued sales of fresh and frozen foods and liquor.

Year-to-date sales were down by a similar amount.

Red Shed third-quarter sales were down by 1.5 per cent but same store sales were up 1 per cent while Warehouse Stationery sales were down 10.5 per cent.

The company's directors said adjusted net profit for the full year would be similar to last year and they haven't seen fit to say anything different since May.

Warehouse shares gained a cent to $3.93 yesterday.

TRICKLE-DOWN EFFECT COULD HIT EPIC

George Kerr's Equity Partners Infrastructure Company's (Epic) $60 million capital raising closes in two weeks.

The offer has come in for some scrutiny not only for the opaque nature of the new investment in British motorway services group Moto, but also over whether key investment Thames Water will be able to maintain its current level of dividend payout. Epic holds a 1.04 per cent stake through Thames Water Holdings.

British water regulator Ofwat has issued its draft determination on the prices Thames is permitted to charge customers over the next five years and it limits the company to zero price increases other than adjustments for inflation. Its final determination is due in November or December.

Thames' own business plan, Epic director and former British water industry executive Margaret Devlin told Stock Takes this week, assumes price increases of inflation plus 2 per cent to 3 per cent. "If the final price limits are set at a level lower than those budgeted for by Thames Water's management in their business plan", Epic says in its prospectus for the offer, "Thames Water's dividends could be lower than anticipated.

"This could reduce the dividends that Epic is able to pay, and/or the value of Epic's investment in Thames Water. This is a risk for shareholders in Epic."

WHAT REGULATORY RISK?

So why didn't Epic wait until this "material" regulatory uncertainty was out of the way in a couple of months' time before making its offer to investors?

"When is there ever the right time to do something?" says Devlin.

How about after this significant regulatory uncertainty is removed?

"I don't think it's significant regulatory uncertainty. It is part of the process. If you put off doing the capital raising until after the determination then who knows what could happen? There could be something else."

And if the final determination was in line with the draft ruling, would that present problems in terms of dividends?

"I don't believe so from the numbers we've modelled?"

So why warn of this in the prospectus?

"It's prudent to advise there could be a potential risk. Equally if we hadn't put that in then people would have criticised us for not putting it in."

So Devlin doesn't believe the determination represents a risk to Epic's dividend payouts? "No."

Not entirely consistent with what Epic is saying in its prospectus is it?