Foster's Group (FGL) Update

Submitted by Jim Thesiger on 10 June, 2008 - 16:49

Foster's Group (FGL) have recently recovered to the $5.60 level from low around $4.80 in March from Australian stockmarket analysts from Macquarie Research.

Foster’s Group (FGL)- Pouring down the drain?

It has been an unhappy time of late in the Foster’s Group camp and today’s downgrade to earnings guidance is unlikely to provide investors with any new confidence. Foster’s have recently recovered to the $5.60 level from low around $4.80 in March, but this could potentially be the end of the run for FGL.

Source: IRESS Daily

Foster’s today announced an FY08 earnings guidance downgrade to $700m - $715m vs. consensus earnings of $723.3m. The negative sentiment stretches further than just earnings, with the company also announcing write-downs to their wines asset carrying values, a strategic review of its global wine business and the departure of CEO Trevor O’Hoy.

FGL expect to report a non-cash impairment charge of $600m - $700m to the value of global wine assets. Additionally FGL expect to report a $70m write-down to their Australian Bulk Wine inventories due to higher than expected FY08 Vintage and lower than expected Sales.

FGL’s acknowledgment that "it paid too much to acquire wine assets" that it "did not execute the SRP integration as well as we expected" and "operating conditions are now more challenging" is a positive step.

However, no solutions have been provided by the company, nor will they be easy to find. In April 2008 management and the board apparently instituted a broad range review of Foster's global wine strategy and operations. This is considering the optimal structure and operations of the wine business into the future. However to date no solutions have been put forward. And there is also no replacement for the CEO.

We envisage flat profits and rising interest and tax rates in FY09. FGL has actually bounced ~3.5% today, however, given the lack of direction, poor earnings outlook and continued challenging conditions we would tend to view today’s strength as an opportunity to take some money off the table in FGL as the road back to success looks to be a very long one.