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There could be gold in them stocks - A look at INL, SEU, CED & CAH

By Frank Fernandez

Thursday 28th September 2000

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With much investor interest focused on the future of the remaining Fletcher stocks, it is little surprising that other stocks on the NZSE have been relegated to playing secondary roles in recent times. For those able to tear themselves away from the FCLs, there are quite a few interesting possibilities out there which include the following:

Independent Newspapers Limited (INL) whose $11.3 million entry into the race for third-generation (3G) spectrum appears to be a highly-interesting move. 3G spectrum is all about sending and receiving wireless communication and INL most certainly seem keen to take on Vodafone, Telecom and Telstra-Saturn in this regard. However the company is quite reticent about its plans with Managing Director Mike Robson only saying that INL's plans will become clearer if it is successful in its spectrum bids.

So what can we make of all this? It is common knowledge that INL sees strong commercial opportunities in the future for the delivery of content over new cellular services and platforms. More specifically, it sees opportunities in data services, narrowcasting, video and multi-media.

In analysing INL's possible future plans, one must take many factors into account.
1. The world has seen, earlier this year, the much-celebrated marriage of AOL and Time Warner, a union of content and delivery.
2. SKY TV (49.6% owned by INL) is destined to rule the digital TV roost in New Zealand - especially when it gets the Television New Zealand business (after it goes through the necessary and inevitable political quagmire).
3. INL has launched, very successfully, its website www.stuff.co.nz which provides an excellent depth of news content.
4. Xtra is the top ISP in the country and is owned by Telecom who paid premium dollars to obtain its 10% stakeholding in INL.
5. INL is majority-owned by Rupert Murdoch's NewsCorp whose future plans in the convergence field are well-documented.

Taking everything into consideration, it is therefore little surprising that INL would want to increase its stake in the multi-media arena by preparing the necessary groundwork now. Mike Robson says it is too early to indicate whether INL would deliver a network or specific services on its own or in partnership with others. "However, these issues would be addressed as the results of the spectrum auction become known". Loosely translated, this means "We know who we are going to be buddies with but we are not telling you yet". Definitely a stock to keep a watchful eye on especially at its current price of $3.50. Lest we forget, this is a stock that Telecom paid $4.25 per share not so long ago.

Another company set to make the headlines is South Eastern Utilities (SEU) which is poised to announce a new acquisition over the next few weeks. The Christchurch-based company has been sitting idle for the past year but has $70 million in cash - proceeds from selling its Wairarapa electricity business last year and from bank interest accrued from the cash since the sale. SEU has been actively pursuing a number of promising investment opportunities since selling Wairarapa Electricity and is understood to have narrowed its options down to three potential investments. With borrowings added to the cash it has, SEU could easily fund a $120 million purchase. And if the issue of new shares is added to the equation, then the opportunities further increase.

The strong financial backgrounds of the board of directors also lend weight to the prospect of SEU acquiring a stake or stakes in companies which will ensure further increased stakeholder value. Indeed Chairman Norman Geary has indicated that whatever is chosen, the investment must be able to be doubled in value for the benefit of shareholders.

In May this year, SEU purchased 20% of Christchurch-based software development company, ViaNet Limited. The investment has a book value of $430,000 with SEU having an option to purchase a further 20%. ViaNet is a software development company providing Application Service Provider (ASP) products to the marketplace.

Formerly known as Amuri Motors Limited, South Eastern Utilities enjoys strong South Island investor support with 80% of its shareholders domiciled in Canterbury. Pyne Gould Corporation is the largest shareholder in SEU with 50.28% of total shareholding. However, with only 27% of shares in public hands, liquidity has always been tight and the stock is invariably lightly traded. The stock last closed at $0.96 cents - a good discount on its estimated value of $1.08. Another to consider in one's deliberations.

A company that is definitely up for grabs is Cedenco (CED) which is up for sale after Brierley indicated it wanted to sell its majority 48.5% shareholding in the company. BIL no longer considered the business of Cedenco "strategic" to its new direction. To allow other shareholders to participate in the sale process on similar terms as BIL, the board of Cedenco decided (and responsibly so) to seek offers for 100% of the company from prospective buyers.

Cedenco, a transnational (operating in New Zealand and Australia) manufacturer of bulk food ingredients, is on target to achieve, for the full year ending 30 September 2000, a net surplus before tax of $3.11 million. This compares with $2.21 million for the 1999 period - a 40% increase. With the expected growth of the existing New Zealand business, the addition of the new five-year Heinz Wattie processing contract and other growth initiatives, this rate of growth is expected to increase to 50% or $4.7 million net profit before tax in the 2001 financial year.

In July this year, Golden Circle did not proceed with its earlier intention of acquiring 50.8% of CED to add to the 0.7% that it already owned. It is understood that price was the sticky point with Golden Circle only willing to offer between $1.38 and $1.65 for the proposed buy. CED is trading around the $1.29 mark - which suggests that some quick and handsome capital gain could be just around the corner for new investors.

And last but not least, my speculative punt on a blue chip stock. At its last price of $1.64, Carter Holt Harvey (CAH) must surely be worth a look at if only for the fact that it is due to announce some staggering half-year results on 18 October. Sure, we have seen similar results being announced in the past without a ripple in the share price but things have changed though. CAH is now cash-rich and debt-free. The Kiwi dollar has sunk to an all-time low against the American greenback. An overseas corporate has taken out an interest-rate option for NZ$1.75 billion locked in at 40.10 US cents. CAH has been mentioned as a potential target along with Contact Energy, Fletcher Energy, Telecom and The Warehouse. There are valid arguments against the rest being possible targets. CEN would require 40% shareholder Edison to sell (and it is sitting on a 60% loss on its current shareholding). The market capitalisation of FEG is over $3 billion. TEL's market cap is about $10.6 billion (and any acquisition over 10% requires governmental approval). Stephen Tindall of The Warehouse is unlikely to sell his shares which only leaves.....you guessed it!

If ever there was a better time for International Paper to buy the 49.7% of CAH that it does not own, it must be now. In April 1995, IP bought out BRY's shares in CAH for NZ$3.55 (US$2.40) and other shareholders at NZ$3.80 (US$2.57) a share to take its stakeholding to 50.3%. In April 1995, the Kiwi dollar was trading between US$0.65 - US$0.68 cents. The Kiwi dollar is now trading below the US$0.42 cents mark and CAH shares can be bought on the open market for US$0.69 cents. Analysts have valued CAH shares at between NZ$2 - $2.50 but then Fletcher Paper was sold to Norske Skog at such a higher premium than the value placed on the stock by these same analysts.

Being of the cheeky ilk, I recently emailed the Investor Relations department of International Paper in the U.S. asking them to specify the timeline set by IP for the acquisition of the rest of the CAH shares it did not already owned. Not receiving a reply after a week, I emailed IP's spin doctors again last Monday. I am still waiting! Happy investing.



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