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Green light from regulator could see Challenger rocket

15 Nov 2012 THE AGE - MATTHEW KIDMAN


Challenger Ltd

THE last time we wrote about Challenger, it was under enormous pressure because investors were uncertain whether the company's life division needed extra capital to satisfy the demands of industry regulator APRA under LAGIC (life and general insurance capital).

Challenger sells annuity products backed by long-dated investments. Despite the company's reassurances about sufficient capital, the share price has continued to slide, underperforming the overall market by about 30 per cent over the past 12 months.

On the face of it, Challenger is incredibly cheap, trading at about 0.8 times book value and on a price-earnings multiple of about 5.5 times forecast earnings. Most industry analysts believe the stock is worth 25 per cent to 30 per cent more. So why is the stock floundering? Some argue lower interest rates make annuities less attractive. Others believe the catalyst will be a confirmation by APRA on the capital position, together with a buyback of stock by the company. The stock could motor higher quickly, so watch carefully, with the AGM coming up on November 26.

Wotif.com and Webjet

HAS the time come for these two businesses to seriously talk about merging? Wotif is predominantly an online accommodation booking agency with a developing online flights business. By contrast, Webjet is a flights booking agency, moving aggressively into the accommodation area. In a small market the two big domestic online players seem to want to step on each other's toes.

Webjet recently launched its latest flight and accommodation package offering, while Wotif, struggling to get earnings growth, increased the commissions it charges accommodation owners. Both seemingly have entered a lower growth phase.

Wotif, with a market value of about $1 billion, is much bigger than Webjet at $270 million and needs to be the instigator of any talks. For several years now Wotif has ignored Webjet, believing its business model of charging customers a booking fee to source the cheapest domestic plane flights is flawed. In the meantime, Webjet's earnings have powered higher and Wotif has been forced to start its own flights business.

An opportunity for merger talks might emerge with the pending departure of Wotif CEO Robbie Cooke. The new Wotif boss might believe it is better to get into bed with Webjet to fend off large offshore players in the online market, such as Expedia and Priceline. The decision by Wotif to raise the commission rates paid by hotels over the next two years has seen the share price spike but investors are still concerned the company has already gone ex-growth and needs to grow the top line to justify its price-earnings multiple of about 18 times.

Premier Investments

MOST of the big apparel retailers will be giving the sharemarket updates in coming weeks. The word on the street is October was a much-improved month for the industry, breathing some optimism into stock prices.

If apparel spending has started to bump up in Australia some of the big beneficiaries would be Myer, David Jones, Pacific Brands and Premier Investments. We should all keep a close eye on the commentary because these beaten-up stocks can move quickly on any positive news.

Interestingly, shares in Solomon Lew's Premier have already risen 41 per cent since June, with its shareholding in Breville soaring and improving results from the retail division under Mark McInnes. For some time there have been suggestions Lew is keen to make a big acquisition. No such move has been forthcoming.

However, a strange item appeared in the most recent Premier accounts. During the six months to the end of July, the group invested $21 million in a financial instrument that delivered a profit of slightly more than $4 million. At the time of the books being ruled off, the value of the instrument had shrunk to just below $17 million. The accounts failed to disclose what the instrument pertained to.

Some pundits believe it could have been the purchase of an option or some derivative product over another retailer. Top of the list is McInnes' old company, David Jones, which enjoyed a big spike in its share price when it received some takeover interest from little-known UK-based EB Private Equity. matthewjkidman@gmail.com

The Age does not take responsibility for stock tips.