COMMERCIAL Waitaki Takes Advantage Of Troughs And Peaks

Press, Volume CVIII, Issue 31863, 16 December 1968, Page 25

COMMERCIAL Waitaki Takes Advantage Of Troughs And Peaks

The Waitaki Farmers’ Freezing Company, Ltd, appears to be taking advantage of the peaks and troughs experienced by meat company shares in pitching its bid for the Canterbury Frozen Meat Company, Ltd. While the price of 215 c for Waitaki’s 50c shares is relatively much higher than the 175 c paid for the 100 c shares of 'C.F.M. before the “don’t sell” warning, the shares historically have been more closely valued.

And apart from this—C.F.M. shares achieved a peak of 275 c in 1965 against 180 c for Waitaki—it is unlikely that C.F.M. shareholders will be able to realise this apparent paper profit should the bid prove successful.

For one thing, the selling required to turn the difference between the 175 c paid for C.F.M. before the bid and the 286 c price placed on Waitaki by the market now, is likely to depress the Waitaki shares quickly, dissipating the apparent 111 c capital profit.

vestment and future profits should average about $500,000 annually. Combined Profit Therefore, a combined profit might be assumed to be about $925,000. Waitaki'* capital is $1,521,000 and it would need to issue another sl.Bm plus $200,000 for the preference capital (which would still have to be serviced if not acouired), making a total of $3,521,000 for the WaitakiC.F.M. group. A reasonable dividend from a profit of $935,000 would be about $467,500. This would allow a similar amount to be retained for building up reserves and liquidity, although Waitaki has had a lower dividend cover ranging from 1.5 to 1.7 times in the last three years. Possible Dividend This $467,500 represents ai dividend of about 12) per cent ion the $3.5m capital, Against 16 per cent now paid by Wai- ; taki. The yield on meat company shares over the years has been about 5 per cent, although; Waitaki’s has been about 4 per cent. An average for the; combined group might be! about 4.5 per cent. Based on a 124 per cent dividend and a dividend yield of 4.5 per cent, the theoretical

For another, the combined profits of the group after the i takeover bid are likely to be ; such that the dividend rate of 16 per cent paid by Waitaki will probably have to be reduced. The dividend yield is a major factor in determining the price of Waitaki. This is , reflected in the wide price | range of Waitaki shares over , the last three years as the ' dividend has been raised from I 12.08 per cent. Any reduction in dividend < therefore will probably be ] followed by a fall in share prices. The size of future profits will determine the size 1 of future dividends. Exceptional Year ' Waitaki’s profits have steadily risen in the last few years 1 and in the latest year were a record $425,000 However. 1 1968 was an exceptional year and if Waitaki can maintain its profit at this latest figure, this will be satisfactory. , C.F.M. has about four bad < years in every 10. Although: the profit for the latest year i is about Sim. the average in the last 10 has been about ■ $300,000. I; However, C.F.M. has, in the last five years, concentrated ] on capital expenditure to i bring its three works up to I a very high standard. From now on, the company should i reap the benefits of this in-' i

price of Waitaki-C.F.M. would be 138.5 c, against 215 c now. As well, the $850,000 cash needed by Waitaki to pay to C.F.M. shareholders will be lost liquidity to the group and thus will result in a setoff against share prices. The market might allow about 5c a share for this loss in reserve, which would bring the share price of Waitaki-C.F.M. down to 133.5 c. Capital Gain On these assumptions then, a C.F.M. shareholder would give up five shares at 175 c each (equal to 875 c) minus 140 c cash, or the equivalent of 735 c. In return, he would receive six shares at 133.5 c each, or the equivalent of 801 c. The profit then would be 66c or 13c a share, if C.F.M shareholders were to accept the bid. However, C.F.M. shares have recently been rising and this 13c gain on a price of 175 c would seem to be well within the potential rise in share prices over the next 12 months. Current Value

Bearing in mind the possibility of, a reduced dividend in the future, it would appear that if a present C.F.M. shareholder wanted to make a capital profit from the present stat* of affairs, it could best be done by selling C.F.M. shares on the market at the

current price of 215 c. Thor" who sold out at 230 c earlier last week will perhaps be the ones who gain most from this take-over bid. At 215 c, the market does; not seem optimistic that the I bid will succeed, especially I when a theoretical price of; 286 c is placed on each C.F.M. share. Certainly, factors outside the market have had their effect on the chances of a successful Waitaki offer.