Knocker calls it wine time at Foster's and investors lap it up

The Merrill Lynch analyst David Errington has crossed swords with the Australian brewer many times, especially over its ill-fated $7 billion foray into the wine sector.

But in his latest research note Buy ... It's Time Errington upgraded his price target on Foster's from $5.40 to $6.50.

Errington believes Foster's is now "heavily undervalued" because of tentative signs of a turnaround in the global wine industry and continued strong performance of its beer business.

"Foster's beer business is expected to generate $1 billion in EBIT [earnings before interest and tax] in the next year or two, meaning it would be easy to value beer at an enterprise value of $12 billion which is Foster's current total [enterprise value]," he wrote.

"This implies that wine is valued at zero. And wine should generate around $350 million of cash in [2008-09] despite dreadful market conditions."

The last time Errington advised investors to "buy" Foster's was before its $3.1 billion acquisition of the winemaker Southcorp in 2005. More recently, the analyst has turned his critical eye to Wesfarmers.

Shares in Foster's closed 28c, or almost 6 per cent, higher at $5.24 yesterday.

Foxtel target practice

The battle for control at Consolidated Media Holdings could have wider implications for the pay TV industry.

Analysts are taking the view that any decision over the future ownership at Foxtel makes Austar a possible target.

Yesterday a UBS analyst said: "If allowed to retain its 50 per cent stake in Foxtel, Telstra itself may become the pay TV consolidator and may look to acquire Austar.

"This may trigger other bids in the space, with Austar's major shareholder Liberty currently holding 55 per cent and Foxtel having expressed interest in acquiring Austar in the past."

The prices paid in Seven Network's raid on Consolidated Media implied an earnings multiple of 8.3 for the pay TV company, the broker said.

That means shares in the regional counterpart, which is trading at 7.7 times earnings, still had room to rise, and there was "further valuation upside for Austar over the longer term in the event of pay TV consolidation".

Low-cost flight threat

The long-haul subsidiary of the low-cost Malaysian airline AirAsia is expected to announce plans to fly daily between Sydney and Kuala Lumper from November a move that would increase the challenges facing Jetstar's international arm.

AirAsiaX already flies daily to the Malaysian capital from Melbourne and Perth, and it runs four services a week from the Gold Coast. Sydney would be its fourth Australian destination.

The airline has local approval to fly the Sydney-KL route but was awaiting the consent of Malaysian authorities.

If the plans go through, the airline will threaten Jetstar and its parent, Qantas, even on the Kangaroo route between Sydney and London.

AirAsiaX in which Virgin Blue's major shareholder, Richard Branson, has a 20 per cent stake offers passengers another alternative to Europe, flying by way of the Malaysian capital.

Real estate respite

Investors poured cash into the real estate investment trusts yesterday, despite more asset devaluations and expectations of a grim reporting season on the horizon.

A partial takeover offer for Tishman Speyer Office Fund by Madison International Realty in the United States received a mixed response as the target advised investors to hang tight for further news.

Tishman Speyer Office Fund is focused primarily on investing in office properties in the US. It is managed by the ASX-listed Tishman Speyer Australia.

Madison already owns 20.1 per cent and wants to increase its stake to about 40 per cent.

Following the 30c offer, Tishman's units closed up 7c at 30.5c.

Analysts at Citi calculated that Madison's offer was at a 55 per cent discount to Tishman Speyer's 65c net asset value and said "we recommend investors do not accept the offer".

JPMorgan said it believed that risks remained over the trust's ownership structure and the weakening US office market.

Following the herd

Interesting to note that while James Packer has been busy fending off the media mogul Kerry Stokes, he has also quietly reduced his interests in the uranium explorer WildHorse Energy.

Packer's Consolidated Media Holdings has ceased to be a substantial shareholder in the resource tiddler after having as much as a 6.5 per cent stake.

Macquarie Group's interests have also fallen over the past two months from 11 per cent to 8.7 per cent.

WildHorse had gained from having Packer and Macquarie on its register, but the slide has been all down over the past two years. Its shares have fallen 92 per cent since they reached an all-time high of $3.44.

Yesterday the stock closed down 0.5c at 28.5c.

Apart from his huge gaming interests, Packer has also invested through his unlisted hedge fund, Ellerston GEMS, in the tobacco giant Philip Morris International.

xchange@smh.com.au