Goodman Fielder (GFF) Update

Submitted by Jim Thesiger on 2 June, 2008 - 22:53

Goodman Fielder (GFF) has a share price target of $1.85 from sharemarket analyst Macquarie Research Equities.

Goodman Fielder (GFF) Fuel cost pressures likely to hurt

Event: Fuel costs another headwind:

Australian retail petrol prices are up 9% YTD and 16% yoy. Distribution costs (predominantly fuel but also labour etc) represent c30% of the delivered cost of a loaf of bread or bottle of milk. GFF sub- ontracts the majority of its daily transportation with monthly invoicing in arrears. FY08 guidance of +/-5% NPAT growth is unchanged however continued headwinds suggest the bottom end is more likely in our view.

Impact: Estimates trimmed -2.8%:

We have trimmed our FY08-10 estimates by 2.8% reflecting higher fuel costs and further NZD weakness. Our FY08E NPAT is now -4% yoy. The acquisition of Paradise Foods in March 08 should be a positive (but small) tailwind from FY09.

Action: Rotation to private label an ongoing risk:

Trading conditions remain difficult for GFF and WOW's recent bread discounts (to $2.28/loaf versus GFF's entry-level Mighty Soft at $4.09/loaf) could accelerate the likelihood of consumers trading down. Fonterra also cut NZ milk prices in the last 2 weeks continuing the theme of tough competition. Private label presence suggests GFF enjoys less pricing power than LNN or CCL in our view.

Valuation: Maintain Neutral

We maintain our Neutral rating but trim our price target to $1.85 (from $2.00) based on the average of DCF (9.4% WACC; 1.0% terminal growth) and sum-of-the-parts. At $1.85 GFF would trade on 13.7x 09E EPS being a 15% discount to the All Industrials ex Financials, which we deem fair.

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