Foster's Group (FGL) News Update

Foster's Group (FGL). The target has price increased from A$5.65 to A$6.10 from sharemarket analyst Macquarie Research Equities.

Foster's Group (FGL) Ltd: Change Is In The Air

Upgrade to Buy — The potential for improved operational execution and/or structural change at FGL has materially increased. The company has commenced an international search for a new CEO following the resignation of Trevor O’Hoy. It is also undertaking a review of its wine operations, which could have wider positive strategic implications.

Structural Change — The already commenced Strategic Wine Review will “consider the optimal structure and operations of our wine business into the future.” The Board’s acknowledgement that it paid too much for Southcorp, poorly executed integration and the need to deliver value to shareholders suggests structural change including potential divestment(s) will be considered.

CEO Search Begins — The Board will consider both external and internal candidates for CEO. We favour an external candidate who can bring the operational expertise and experience necessary for improved execution. The incoming CEO is likely to have input into the Wine Business Review.

Earnings Guidance — FGL has downgraded FY08 guidance to below consensus. Revised guidance is for NPAT (pre-significants) of A$700-715m. Our bottom-end estimate of A$700m remains unchanged. The company also announced it expects non-cash wine business writedowns of A$670-770m to reflect asset impairment and surplus bulk wine inventory.

Re-Rating Justified — We expect a re-rating of FGL shares. The valuation gap to international peers will likely close as sentiment improves given the potential for better execution. Moreover, the potential for wine asset divestment(s) could help to unlock further value. Our target price increases from A$5.65 to A$6.10.