First Round: Plug The Betting Leak In The Territory

Sydney Morning Herald

Thursday May 22, 2008

Edited by Colin Kruger

Brokers believe Tabcorp's foray is defensive and it will be back for more.

WHILE positive noises were being made about Tabcorp's foray into the Northern Territory bookmaking market it didn't generate enough excitement to stop its stock from falling for a second day in a row.

Tabcorp shares dropped 17c to $11.28 yesterday, with brokers discounting the effect of its move in the short term.

Deutsche Bank's Mark Wilson said it was "largely a defensive move but nevertheless a strategic position" which should plug the "leakage" from Tabcorp's wagering operations in NSW and Victoria. According to Tabcorp, the Territory operators are draining an estimated $70 million to $80 million from its earnings before interest and tax.

The Territory operators have been able to offer attractive odds due to the lower taxes they pay and the lower product fees to state racing bodies. They are also able to offer a wider variety of bets, covering anything from Australian Idol to the US elections.

Analysts were themselves punting that a Northern Territory licence would not rule out Tabcorp from acquiring a rival to build scale quickly.

"Tabcorp's move may be a precursor to an acquisition, in our view," said ABN Amro's Fraser McLeish. "A NT bookmaking licence is not transferable, so Tabcorp would need to be licensed in the NT before acquiring an existing player."

According to recent reports, Tabcorp ran a ruler over Sportsbet but found the $100 million-plus price tag a little rich for its liking.

Golden era for Lion

One day after issuing a scathing commentary on the Foster's wine business, Merrill Lynch has provided a glowing research note on its main domestic rival, Lion Nathan.

Following Lion Nathan's reaffirmation of its forecast of a "significant step up" in profits in 2008-09, Merrill has not only slapped a "buy" recommendation on the brewer but has predicted that a "golden period" is fast approaching for the company.

"For the first time, we believe Lion Nathan is in a position to deliver two to three years of double digit earnings growth - an attractive profile for a company that has in the past struggled to deliver earnings growth [above] 5 per cent in a good year," said the Merrill analyst Penny Heard.

The key to Lion's success, according to Merrill, will be the recent upgrades to its NSW and Queensland breweries, cutting at least $15 million in costs a year and the increased uptake of higher priced premium beers such as Hahn Super Dry.

But the kicker could be the Foster's struggling wine business. Merrill reckons Foster's cannot afford to trigger a beer price war in the only business it has that is making a decent return. Hence, Lion could face little competition if it decides to raise beer prices in order to offset higher barley and hops prices.

Foxtel will still pay

The global credit squeeze has made its presence felt at the pay TV provider Foxtel.

Consolidated Media Holdings - a shareholder in Foxtel - said that due to less than favourable credit market conditions, Foxtel would delay refinancing its debt. It would maintain a debt to underlying earnings ratio of about three times in the short term but would review that as credit markets improved.

Notwithstanding that, Foxtel has confirmed it will draw down to the limit of its existing debt facility and distribute this amount to its shareholders. As a 25 per cent shareholder, Consolidated Media will receive a distribution of $25 million in July.

Foxtel said previously that if the cost of debt was too high, shareholders were willing to defer distributions funded by increased debt.

In the lap of oil players

Credit Suisse has ramped up its earnings forecasts for Woodside Petroleum and Santos, Australia's second and third largest oil and gas producers, by more than 30 per cent because of higher oil price forecasts.

The broker boosted its estimate for Woodside's earnings per share by 32 per cent for 2008, 36 per cent for 2009 and 35 per cent for 2010. It raised the 2008 earnings estimate for Santos by 37 per cent and the 2009 estimate by 36 per cent. Estimates for Oil Search, Papua New Guinea's biggest oil producer, were raised as much as 44 per cent.

"By and large the sector has now become an oil price momentum play only weakly supported by forecast earnings and valuations," said the Credit Suisse analyst Andrew Williams.

Stake in nickel miner

Some clarity has emerged around the likely selling price for Lion Selection's 20.5 per cent stake in the Zambian nickel miner Albidon.

It has been on the block for at least six weeks - and is believed to have attracted interest from the likes of Zinifex and Xstrata.

The sale won't necessarily trigger an immediate takeover because Albidon is dual-listed on London's Alternative Investment Market, where there is a 30 per cent takeover threshold. But as one of the world's few remaining independent nickel sulphide producers, it is certainly a strategic holding.

Lion, which plans to return sale proceeds to shareholders, gave indicative values of what the mining investment house was worth if Albidon sold for $4.50, $5 or $5.50 a share.

RBC Capital Markets had a $4.50 price target on Albidon before the investment banking arm was hired as the nickel miner's defence adviser and research restrictions were applied.

Albidon shares closed 9c higher at $4.39 yesterday.

Whiff of iron ore

These days nothing seems to move a tiddler explorer's share price faster than the revelation of a massive iron ore exploration target.

A few weeks ago Maximus Resources shares rocketed after releasing an exploration target of up to 3 billion tonnes of magnetite.

Yesterday Epsilon Energy shares more than quadrupled during trading after it released an investor presentation which revealed it was targeting 1 billion tonnes of iron ore from its tenements in the Pilbara.

Let's hope the eager investors who piled into the stock realised that nary a hole has been drilled. The presentation made reference to a large geophysical signature indicating the presence of magnetite.

It seems someone did a double-take after the frenzied reaction to the announcement. After trading as high as 87c in the morning, Epsilon issued a "clarification" and its shares closed at 68c, up 51c for the day.

With cash running low Xchange wouldn't be surprised if it takes advantage of the high share price to raise some money soon.

xchange@smh.com.au