Morningstar Equities Research - POT-NZ, GFF, GWA, SVW

Morningstar Equities Research - POT-NZ, GFF, GWA, SVW

Port of Tauranga Limited POT-NZ| Kotahi Deal Significantly Increases Dairy Shipments from Port of Tauranga and Provides Future Upside

Morningstar Recommendation: Reduce
Nachiket Moghe, CFA, Morningstar Analyst - 64 9 915 6776
We lift our fair value estimate for Port of Tauranga to NZD 14.00 per share from NZD 13.00 per share following the recent alliance struck by the company with freight and logistics management company Kotahi. In our view, the alliance will result in higher revenues and earnings for the company driven by increased dairy shipments through the port. We have revised our longer-term forecasts to reflect the increase in dairy volumes once bigger ships start calling at Port of Tauranga. Our 2014 and 2015 forecasts remain broadly intact.

Our wide moat rating on the company remains unchanged, reflecting the low cost structure, high productivity and excellent road and rail connectivity to and from the port. The alliance with Kotahi further strengthens the firm's competitive position as it will be the only port in New Zealand to attract bigger ships. It also reinforces our thesis that, going forward, cargo consolidation in New Zealand is inevitable and Port of Tauranga will be the biggest beneficiary of this consolidation.

Goodman Fielder Limited GFF| Goodman Fielder Agrees to Lower Takeover Price

Morningstar Recommendation: Reduce
Peter Rae, Morningstar Analyst - 0414300107
Goodman Fielder has entered into a scheme implementation deed in relation to the takeover offer from Wilmar International and First Pacific Company. However, the agreement is for AUD 0.675 per share, down from the previous indicative offer of AUD 0.70 per share. Shareholders will still be entitled to receive a AUD 0.01 per share final dividend for fiscal 2014. The board will unanimously recommend shareholders vote in favour of the scheme subject to the independent expert concluding the scheme is fair and reasonable.

It is disappointing the offer has been reduced slightly as it appears the bidders have used the due diligence outcome to lower the price. Goodman Fielder announcing a non-cash impairment charge in the range of AUD 300 million to AUD 400 million has not helped. The fact that the Goodman Fielder board has agreed to the lower offer indicates it considers the probability of a higher bid to be low, and we agree. It also appears to accept this is a better outcome for shareholders than waiting for it to realise value through potential improvements to the business.

Despite the lower offer, we still consider Goodman Fielder overvalued and believe the offer looks attractive. It represents a 35% premium to our unchanged base-case fair value estimate of AUD 0.50 per share and is just below our bull-case scenario valuation. On this basis, we recommend shareholders vote in favour of the scheme or sell on-market now. Selling on-market provides greater certainty than waiting for the scheme to be implemented. If the takeover were to fail, we believe the share price would fall closer to our fair value estimate. In our view, the outlook for no-moat Goodman Fielder has not improved and the impairments indicate the extent to which the assets are underperforming. Goodman Fielder operates in a difficult industry with strong competition across its core categories and its major supermarket customers hold significant bargaining power.

GWA Group Limited GWA| Upgrading GWA's Moat Rating from None to Narrow Based on Competitive Advantages

Morningstar Recommendation: Reduce
Tim Mann, Morningstar Analyst - 02 9276 4416
Following a comprehensive review of GWA Group and its competitive advantages, we have decided to upgrade the company's moat rating from no-moat to narrow. We have marginally increased our longer-term earnings estimates and our fair value estimate increases to AUD 2.30 from AUD 2.20 per share.

We believe GWA's bathroom and kitchen division has competitive advantages which support a narrow moat rating. For the past 10 years, the division has delivered returns well in excess of the group's weighted average cost of capital, or WACC. This has been achieved despite considerable volatility in the alterations and additions market (contributes approximately 50% of GWA's revenues) and subdued detached housing starts (but now improving). Brand strength is high, with names such as Caroma, Dorf, Fowler, Stylus, Radiant, and Clark among the most recognisable to consumers and builders in Australia. GWA is particularly dominant in toilet suites, holding 45% market share. Established and solid distribution channels, including strong relationships with market-leading plumbing retailers (Bunnings, Reece, Tradelink) also help maintain market position and prices. A long history in the Australian market, since 1941 in Caroma's case, has allowed the company to build its presence, reputation and brand awareness. We also note that GWA imports 85% of its product range, which reduces manufacturing risk and provides cost advantages.

The bathroom and kitchen division is able to sustain premium prices with its products about 30% more expensive than competitor Roca. The premiums have been maintained for the past several years and reflect the pricing power that GWA has.

Seven Group Holdings Limited SVW| Seven Group Funding Nexus Despite Acquisition Bid Rejection

Morningstar Recommendation: Accumulate
Ross MacMillan, Morningstar Analyst - 02 9276 4450
In mid-June, Nexus Energy's shareholders voted not to accept Seven Group's acquisition bid and allowed the company to go into voluntary administration. Prior to the shareholder vote, as a contingency plan, Seven Group acquired Nexus Energy's senior debt and sufficient subordinated notes to ensure it could play a role in the voluntary administration process, if the acquisition bid was rejected. In the past few weeks, the voluntary administrators have held discussions with Seven Group on providing AUD 30 million of short-term funding to enable Nexus Energy's Longtom, Crux and Echuca Shoals oil and gas projects to continue with minimal interruption. Seven Group has agreed to provide the funding, with the debt facility secured against the assets of Nexus Energy. Despite the longer-than-anticipated time frame, we remain confident Seven Group will eventually gain ownership of Nexus Energy's major assets, including the Longtom Gas Project in the Gippsland Basin, 15% of the Crux development licence in the Browse Basin and the Echuca Shoals gas exploration concession. There is no change to our Seven Group forecasts or fair value estimate of AUD 9.00. Seven Group's shares are undervalued with the market harbouring concerns surrounding the deterioration in the profitability of the WesTrac Australia and Seven West Media businesses.

We maintain our no-moat and high uncertainty ratings. Seven Group is an industrial services and investment company, with extremely diverse interests, including full ownership and minority holdings in unlisted and listed industrial, media, property, telecommunications and financial services companies. Executive chairman, Kerry Stokes, holds a 68% shareholding in Seven Group, providing a dominant position on company strategy, structure and management. Seven Group is a complex company with numerous diverse investments which possess only limited commonality, few synergies and restricted transparency.

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