Downer may be in for something of an upper

But there's an increasingly prevalent view the resultant share price drubbing was overdone. Downer shares fell from $6.29 before the downgrade to a low of $3.33 this month.

Merrill Lynch and Citigroup have each published reports highlighting value at current levels, while Wilson HTM's recent Alchemist newsletter to institutional clients concluded that, when compared with the amount of business that Downer had on hand, the stock looked grossly mispriced.

By way of comparison, Wilson looked to UGL, where work in hand of $8.8 billion represents 3.8 times the company's $2.28 billion market capitalisation. UGL has a similar spread of business to Downer's, with involvement in mining contracting, rail manufacture, roads and telecommunications.

The market is very much more cautious when valuing Downer's work in hand. Based on the Downer share price late last week, work on hand of $16.7 billion stood at 13 times its market capitalisation.

Of course, the profitability of the contracts and the level of gearing in the company all mean that comparing work in hand with market cap is only a crude measure of valuation. But Wilson concluded a $7 price target looked achievable in the medium term.

At that price, Downer would still be priced at a discount to UGL, with a work in hand multiple of seven times.

Downer shares closed at $4.16 yesterday, up 5 per cent.

Retail stocks the go

REBOUNDING consumer confidence data adds fuel to the argument that it is time to get set in discretionary retail stocks before sales data, and share prices, head into an upswing later in the year.

Several institutional sales desks have been peddling the idea that the bad news in retail is pretty well out now, but there are better times around the corner. With consumer confidence up 11.1 per cent this month the brokers just might be right.

There's no doubting the six months to June will have generated some disappointing results as consumer purse strings were tightened in response to six interest rate increases together with higher costs of rent, health and utilities.

The effect of the economic stimulus on last year's numbers also detracts from year-on-year comparisons. Indeed, the $12.3 billion apparel sector was down 6.8 per cent for the five months to May. The late arrival of winter across much of the country didn't help.

But analysts expect conditions will improve in the final months of the year as household budgets recover from interest rate increases. Strong growth should then be evident in the six months to June, by which time the effects of fiscal stimulus will have washed through the system.

The smaller specialty retailers most often mentioned as being well positioned as conditions improve are Kathmandu, Premier Investments, and Specialty Fashion Group.

Cooking with gas

MOSAIC Oil's decision, announced yesterday, to embrace a $123 million acquisition proposal from AGL Energy was no surprise. With the Mosaic share price in the doldrums before the approach, the board had little choice.

Still, some of Mosaic's 5000-strong shareholders reckon that the company could have done a better job in advance of the AGL expression of interest.

Shareholders protest that while Mosaic is trumpeting that the 15?- a-share offer represents a 92 per cent premium to the pre-bid trading price, that price reflected the market's lack of understanding of the potential value of using Mosaic's depleted Silver Springs gasfield for storage.

Having access to storage is important when coal seam gas projects are in their

ramp-up phase.

Even now, no details have been released regarding the economics of the gas storage project, making it hard to assess whether the takeover offer has been struck at a fair price.

Still, with Mosaic retaining the opportunity to engage with potential counter-bidders until August 4, the company has three weeks to establish whether any other players in Queensland's coal seam gas sector will place a higher value on the empty oil and gas reservoirs.

Industry talk suggests that Shell is the most likely counter-bidder as Santos and Origin, the other major players in coal seam gas, have established operations in the region and are believed to have access to empty reservoirs of their own.

Ooh, that smarts!

IF THE Elders experience of a few weeks back is any guide, Nufarm shareholders are in for a bloodbath when trading resumes after last night's 50 per cent profit downgrade.

Operating profit is now set to come in at $55-$65 million for the year to the end of June, with back-of-the-envelope numbers suggesting earnings-per-share of about 20?.

As with Elders, the market will be incredulous about claims the current slump in profits is cyclical when it seems structural factors are at play in the agricultural chemicals market.

After five profit downgrades, the temptation will be to assume that current earnings are the new base. At the market multiple, shares would trade at less than $3.

Let's not forget that Nufarm management turned down a takeover offer from Sinochem at $12 a share late last year.

Ouch.

dsymons@fairfaxmedia.com.au