David Symons from Member Insight writes:


AWB’s
share price has declined almost 30% from an all-time high of $6.41 on 12
January to $4.40 at midday today. With increasing
speculation that the company will face structural change as a consequence
of the Cole Inquiry, it is timely to assess what the current share
price tells us in relation to market expectations for this change.

Prior
to the events of the last few weeks, most analysts were valuing AWB
slightly below its trading price, with valuations generally in the
range $5.00 – $5.60 per share.

Current controversy around the
Iraqi Oil-for-Food arrangements would be expected to reduce the medium
term performance of AWB (with some impact on value) even in the absence
of structural change to the business. This is the case as AWB is
currently in a state of internal upheaval. The CEO resigned last
Wednesday, and senior management is going to be distracted from core
business operations for some time to come.

In addition, press reports
are now emerging that wheat sales that would previously have been
secured by AWB in certain markets (particularly Iraq) will now go to
other suppliers. Any difficulty experienced by AWB in maintaining its
markets would both reduce short term profitability and increase the
risk of structural change being imposed.

However, analysts and
commentators are increasingly expressing the view that structural
change is inevitable. There are two major forms of change which would
be possible:

1) Removing the AWB’s ability to veto any application for a
wheat export licence from Australia. It is through this veto power that
the AWB ensures that the single desk is the only conduit through which
wheat can be exported;
2) Either abolishing the single desk, or transferring its operation to a grain company other than AWB.

Two
leading analysts have sought to quantify the valuation impact of
structural change in recent days. JP Morgan assessed the company’s
value at $4.75 per share in the event that AWB loses its veto power and
the company’s share of the export grain market is whittled away by 1
percentage point per year until 2020. Lower valuations would
result if the rate of market share loss was greater, while the base
case valuation would decrease to $3.00 in the event that the single
desk is lost. Macquarie has assessed the company’s value at $3.17 in
the
event that the single desk is lost.

If we assume that JP
Morgan is correct in stating “the removal of AWB’s power of veto over
new export licences would be the best case scenario for AWB”, then we
are left with two broad valuation scenarios:

1) Veto Lost – Valuation approx $4.75 per share;
2) Single Desk Lost – Valuation approx $3.00 per share.

Using
these two measures, the share price of AWB can be used as a crude
barometer for assessing market expectations of the single desk either
being abolished or transferred to another operator. Every 17.5 cents by
which the company’s share price falls below $4.75 represents a 10%
increase in the market’s assessment of the probability that AWB will
lose the single desk.

Therefore, the current trading price of
$4.40 (at midday) indicates that the market currently assigns a
probability of around 20% to the single desk being lost.

Peter Fray

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