Buying miners and groceries

Two events have the market buzzing today: the bid by China’s Minmetals Resources to buy Equinox for $7, and the announcement that Grant O’Brien will replace Michael Luscombe as CEO of Woolworths. A bit from each side of the two speed economy. The bid for Equinox is below the traded price of $7.35 and brokers are hedging their bets about it. Morningstar has downgraded its recommendation from buy to hold, which sounds an accurate assessment of the effect of the bid, but many other brokers obviously think the share price has a way to go and are issuing buys.

UBS is one and has the following to say about it:

In our view, Equinox shareholders have three options i) to approve the LUN transaction (5% assigned probability), ii) accepting the low initial MMR offer (5% assigned probability), or iii) rejecting the initial MMR offer and hold out for a bump or the surfacing of stand-alone value of Equinox (90% assigned probability).

The bid is conditional on Equinox ceasing its takeover bid for 4.8 billion Canadian dollars Lundin Mining. Combank also has a buy noting that the Lundin play has opened the space for Minmetals:

MMR has stated that its offer represents a 33% premium to the 20-day EQN VWAP, but we see the offer as opportunistic, given the recent weakness in EQN’s share price following the LUN takeover announcement last month.

The bid does seem low and if the Minmetals’ play is taking advantage of a depressed share price because of the Lundin play, as seems probable, then the added confusion is probably not going to lead to a higher price in the short term. The question is will Minmetals come in with a higher bid and is it worth hanging around for it come? Crystal ball required. The answer depends very much on what resource security China Inc wants with copper.

The other event was the Woolworths succession. Not much surprise there, and probably not a great deal of change, either. This is what JP Morgan had to say:

1) The announcement of Luscombe’s retirement is not a surprise, given there has been speculation in the press, although O’Brien’s appointment may be a surprise to some. 2) There is potential for a change in culture and the operational approach in addressing the improvement at Coles, especially as we believe that WOW has been slow to focus on Coles and its marketing has not been innovative relative to Coles. 3) The retention of Director of Supermarkets Greg Foran may be a challenge. 4) There could be a change in the medium-term earnings growth guidance at WOW. 5) There is unlikely to be a change in the home improvement strategy. 6) O’Brien inherits a more challenging operating environment relative to Luscombe at the time he was appointed CEO designate.

We retain our Overweight recommendation on WOW. We highlight upside potential in 2011 from food inflation from a sales and EBIT margin perspective, Quantum-led cost savings, valuation support (DCF A$28.38 per share) and strong cash generation as key positives. While sentiment may remain subdued due to the recent earnings downgrade and the appointment of O’Brien, who is not well-known to the investment community, we suggest the current share price provides an attractive risk reward proposition with rising LFL sales growth in Australian Food & Liquor the next catalyst.

Macquarie Equities questions the timing, saying the departure is odd when Woolworths is seen to be “the weaker player” in the supermarket duopoly. The era in which Woolworths benefitd from Coles’ seemingly endless troubles seems over, although Coles’ ability to sustain its price attacks is questionable.

UBS

JPM

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Comments

  1. Woolworths is seen to be “the weaker player” in the supermarket duopoly.

    Bah! Weaker player by what measure Mr Maq? The position of your quotation marks seems you may think the same SoN.

    Coles may be making the more agressive pricing campaign, but WOW is still ahead on sales and market coverage. It’ll take more than a flash-in-the-pan price war for Coles to out-muscle WOW. Only time will tell on that score.

    • The fundamental difference between WOW and Coles is that the latter is still part of a conglomerate with a poor record of capital management. The former is not.

      Although it remains to be seen what happens with the DIY expansion. On the one hand, it could be fraught with danger as the ROIC plummets due to the strong presence of Bunnings. Add in the deflation in the housing market and the subdued consumer and the scope for increased spending on housing related products is limited.

      On the other hand, it could be the best time to do so, as home owners look to improve their own houses and potter about in the garden as WOW fruit and vegie prices skyrocket.

      Whatever the case, WOW is still a much better place to place your capital than WES, regardless of management departures/gyrations.

  2. Yes, Q, I do think the same. To be fair to Macquarie, they do not think Woolies is the “weaker”, but they do think that is the growing sentiment in the market.