Lion Nathan (LNN) Update

Submitted by Craig Strzelecki on 21 May, 2007 - 19:58

Lion Nathan (LNN) has reported its 1H07 net profit last week and surprised sharemarket analysts at Macquarie Research Equities with an almost 9% lift on the prior period. The company also announced a 19 cent fully franked dividend, due on the 4 June 07, providing good yield for those investors looking to increase their income. The analysts state that the operating performance from the Australian operation is solid, and with a highly undergeared balance sheet, and in the absence of corporate activity over the next six months, analysts expects some form of capital management with LNN easily having the capacity and franking credits to return $300m to shareholders. Solid Australian operating performance: Revenue increased 8%, and operating EBIT increased 4.7% (to $231.4m) as commodity costs and a planned increase in marketing investment crimped margins (-110bps). Volume grew by 1.6%, ahead of the market growth of 0.9%, and price realisation was solid on the back of continued mix shift toward power brands, and new product activity. NZ remains difficult: Operating EBIT pre ISI's was flat in NZD (NZ$52.6m) but down 4.3% in AUD. The beer pricing environment remains intense, and management continues to expect flat to declining earnings from this region in FY07. Wine delivered solid growth off a small base: Operating EBIT (pre SGARA) increased 26% to 6.1m. Bottom end of FY07 guidance range increased: Guidance (pre ISI's) now stands at $250-260m, vs the previous range of $245-260m. But FY08 Cost of Goods Sold (COGS) pressure a concern: COGS per litre is expected to increase by 4.7% in FY08 primarily due to barley and aluminium. This view on barley inflation conflicts with ABARE's March forecast for an underlying decline in FY08 - and MRE’s expectation. Lion Nathan's (LNN) hedging profile appears longer dated than we had expected! While beer competitors (namely FGL) will be facing similar inflation, and price recovery is very likely, we will need to review our FY08 forecasts on the back of this news. Capital management absent, but remains on the agenda: LNN suggested that capital management is on hold "until the outcome of corporate development activity is known". While the analyst can identify a number of possible transactions (Wine divestment, Boags acquisition etc) none appear likely in the short term. Meanwhile LNN remains grossly undergeared. In the absence of corporate activity over the next six months, the analyst would expect some form of capital management - with Lion Nathan (LNN)easily having the capacity, and franking credits, to return $300m to shareholders. Lion Nathan (LNN) have a retained Outperform recommendation: This result confirms that LNN's strategic activities are delivering in Australia, the key driver of the company's earnings (~82% of group EBIT). While NZ remains difficult restructuring initiatives and planned price increases provide some hope of an improvement. FY08 COGS are a headwind, and will force us to review their FY08 forecasts, however they believe that the environment remains supportive of cost recovery through price increase. Corporate activity also clearly remains on the agenda: While an acquisition would carry risk, the analysts believe Lion Nathan's (LNN) financial discipline in relation to the Independent Liquor acquisition should help allay concerns. Meanwhile the downside for the LNN share price, in the analysts' view, is limited by underlying valuation support, a solid dividend yield and the option for capital management.

Lion Nathan Limited is listed on the Australian Stock Exchange (ASX) under stock code LNN. You can view their investor website here. The company's principal activities are: Manufacturing, wholesaling and retailing of beverages in New Zealand and Australia. They distribute beer brands such as Tooheys New, XXXX, Hahn Premium Light, James Squire; Wines such as Petalume, St Hallett and Wither Hills; Spirits and RTDs like Coruba, Jamaica Rum, Smirnoff Vodka and Kentucky Straight Bourbon. Find out the meaning of the recommendations in this primer. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade LNN. Check your charts and good luck with your share trading!

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