Profit Assurance Leaves Room For Doubt

Sydney Morning Herald

Tuesday June 3, 2008

Edited by Colin Kruger xchange@smh.com.au

Babcock's shares take a fall as brokers add up the numbers.

THERE was some relief when Babcock & Brown reaffirmed full-year guidance of a $750 million profit at last Friday's shareholders meeting, but doubts are starting to creep in.

The stock dropped below $12 for the first time yesterday before closing 40 cents lower at $12.06 as brokers took a look at what the investment bank needs to do to hit its numbers.

Delayed asset sales and potential writedowns are expected to keep first-half earnings flat. This means Babcock is counting on a doubling in earnings for the second half - driven by the delayed asset sales - and not everyone is keen to back the forecast.

"While we do not have any problems with this in theory, in practice we expect it to place considerable pressure on revenue generation in the second half of 2008, which will likely depend on stable market conditions," ABN Amro's John Hegarty said.

Hegarty was worried that the "continued postponement of transactions could lead to Babcock missing guidance" and trimmed its price target from $15 to $14.60.

UBS also saw deal slippage as a key risk, but placed as much emphasis on the "significant reputational damage" suffered by Babcock due to the poor performance of its satellite funds "and their failure to deliver on targets", seeing this as the hurdle to unlocking shareholder value.

UBS is more optimistic about Babcock's share price prospects though, with a $25 target and an unchanged "buy" rating. So is Deutsche Bank, with a $28 price target despite a downgrade of Babcock's earnings per share over the next two financial years by 5 to 12 per cent.

Odds on a merger

With talk of even further consolidation in the red-hot coal sector, Whitehaven Coal shares hit a record high and Gloucester Coal shares were not far behind yesterday on speculation the pair could merge.

Xchange understands Gloucester has not received a takeover approach from Whitehaven at this stage, nor made one itself. But the pair are co-operating by blending their thermal coal to achieve higher prices and AMCI is a major shareholder on both registers.

Xstrata bid last year for Gloucester but was thwarted when AMCI and Noble Group built up big enough holdings to block the proposed scheme of arrangement.

It is understood Gloucester has had more difficulty lately than usual in finding consultants, with some prospective hires replying they are conflicted. It is therefore believed AMCI and Noble - and probably Xstrata - are keeping a continued watching brief on the NSW miner.

Whitehaven hit a record high of $4.32 before closing 14 cents higher at $4.12, while Gloucester gained more than 5 per cent to close 64 cents higher at $12.40.

It bears comparison

The one positive gift Fortescue Metals has given Rio Tinto could be its sharemarket valuation. With few analysts around to do the formal sums because their investment bank colleagues are working on the BHP Billiton-Rio Tinto deal, good news can be hard to quantify.

If there was one project which seemed to have captured the attention of analysts at Rio Tinto's project briefing last week, it was the $US6 billion ($6.3 billion) proposed Simandou iron ore development in Guinea. The project would initially produce 70 million tonnes a year of some of the highest quality iron ore in the world, rising to 170 million tonnes.

So here is an interesting exercise in valuations.

Fortescue Metals will initially produce 55 million tonnes, but many analysts think its proposed expansion to up to 200 million tonnes of annual production is already being factored into its share price.

Fortescue has a market value of about $30 billion, meaning Simandou - which has higher sovereign risk but higher quality ore - could eventually be in the same ballpark.

One of the few unconflicted analysts, Liberum Capital's Michael Rawlinson, did the sums in another way after the Rio briefing. He noted Rio's iron ore business alone - valued on the same per tonne valuations as "inferior" Australian iron ore companies -would be worth $US300 billion. Maybe a partial float of the business would not be such a far-fetched idea after all.

Tax hiccup oiled over

A bill to end the excise exemption for the North West Shelf's crude condensate passed through the lower house of Parliament yesterday, but you wouldn't know it from Woodside Petroleum's share price.

Despite the excise removal being forecast to add $2.5 billion to Government coffers over the next four years - largely at Woodside's expense - the markets were more focused on soaring energy prices yesterday, boosting Woodside shares by 97 cents to $65.97.

The stock is up almost 10 per cent since the Government announced the news in last month's budget.

Woodside owns between 20 and 25 per cent of condensate output from the North West Shelf venture.

© 2008 Sydney Morning Herald

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