Question 1: What in your opinion is the likely outcome of the Origin (ORG) / Brookfield deal? If you think it will proceed, what is a likely outcome for shareholder? Is selling now a better option?
Answer: Judging by where Origin (ORG) is trading today, the market thinks that a higher bid will be forthcoming.
The Brookfield consortium has bid a combined A$5.78 plus US$2.19 per Origin share, less dividends paid. At an exchange rate of 0.64, this values the bid at $9.20 less 36.5c in dividends paid, a total of $8.84. The shares are trading today at $9.21. Apparently, two of the larger holders (Australian Super and Perpetual) have said that the offer is too low and would presumably vote against the Scheme of Arrangement (unless the offer is improved).
The ACCC authorisation is interesting in that it makes a deal more certain, although it only approved it because it believed that “public interest benefits” outweighed the “lessening of competition”. Specifically, the public interest benefits came from the assistance the new owners would provide with our renewable energy transition.
The market usually gets it right when it comes to takeovers, so I would hang on for a little longer. But if no new or improved bid emerges in the next couple of weeks (it shouldn’t take long for the consortium to work out if it wants to pay a little bit more), I would take the money and run.
Question 2: I would like to hear comment on the ludicrous share offer for Pact Group (PGH) of 68c per share which is lower than the market price. The offer is insulting, almost robbery. The P/E (price earnings) ratio of 4.3x, earnings are 18c/share this year, 16c/share forecast for next year – so 68 cents is ridiculously low when Morningstar have a target $1.64. A P/E of 10x, which is still less than the ASX average, would suggest a target price of $1.80. What do a wider range of analysts think?
Answer: It might be “ludicrous” and “insulting”, but who else is going to buy it? The Chairman, Raphael Geminder, through entities he controls, owns just on 50% of the company – so it is almost impossible for anyone else to make an offer.
Pact Group (PGH) is one of the “doggiest” companies on the ASX, with its shares down almost 80% over the last 12 months. Institutional investors have deserted it, and it is now out of the ASX 300.
Only one major stockbroking firm covers the stock – that is Macquarie, who have a target price of $0.94.
The stock is trading on the ASX at $0.695, just ahead of Mr Geminder’s takeover price of $0.68. There is probably a chance he might improve it marginally, but I wouldn’t be expecting much more than that. Why would he? He effectively controls the company now.
Question 3: In last week’s Boom Doom Zoom, you mentioned government bonds with a yield rate of 4.5%. Can you please advise how they are bought?
Answer: You can buy government bonds (an exchange traded version) directly on the ASX. Have a look at https://www.asx.com.au/markets/trade-our-cash-market/equity-market-prices/bonds [1] For example, the Australian Government Bond maturing on 21/4/33, paying a coupon of 4.5%, is quoted under the ticker GSBG33.
Spreads can be a little wide on these bonds. An alternative is to buy one of the major index tracking ETFs, such as IAF from iShares or VAF from Vanguard, which track the Australian fixed interest market. The Australian Government is the biggest issuer of bonds, so these underlying indices comprise about 53% Australian Government bonds, 37% Semi-Government (State) and Supranational Bonds and 9% investment grade corporate bonds.
Question 4: Given the progressive falls in S&P 500 and ASX, the rise in oil prices, inflation probably incurring further rate rises at least in the US, the worsening property sector in China, do you think there is a high risk of a market crash or serious correction coming? If so, should we start to take losses to preserve what’s left of capital?
Answer: Anything is possible, particularly after the flare-up in the Middle East, but I don’t expect a “crash”. A correction is certainly a possibility.
But I have been around too long and seen too many predictions of “market crashes”, to get too worried. Bad news “sells”.
I live by the adage: “time in the market, rather than timing the market”.