There are two schools of thought on Challenger’s takeover prospects.

The bulls argue Challenger is an attractive bolt-on acquisition for a larger financial services company, given its dominant position in the growing retail annuities market. The bears counter that Challenger’s obvious suitors, the big-four Australian banks, are constrained by new requirements to hold more capital, and more likely to divest than acquire assets. There is logic in both views.

Challenger meets Switzer Super Report’s key criteria for inclusion in its takeovers targets list: it is an attractive investment at the current price regardless of takeover, and has long-term strategic value in its industry.

Challenger must appeal to larger financial services companies, here or overseas, that are struggling to grow in a constrained credit environment. It reported 14 per cent growth in retail annuity sales in the September quarter (on the same period last year), despite an environment of low interest rates. The funds management business delivered $1.1 billion of fund inflows in the quarter. These strong tailwinds could provide a new source of earnings growth for larger financial services firms.

The Federal Government’s response to the Financial System Inquiry, while unsurprising, supports the uptake of retirement investment products that deliver income. Challenger holds an estimated 70 per cent market share of the retail annuities market in Australia, has excellent brand recognition, and strong product distribution through financial advisers. It would be exceptionally hard and costly to replicate Challenger’s position in this market.

Demand for annuities will surely rise as more retirees worry about sharemarket volatility and the need to access reasonable, reliable income streams that last as long as they do. A stronger culture of retail fixed-interest investing, something that has been hard to build in Australia over the years, could finally take hold as the population ages.

Challenger’s dominant position and open shareholder register will appeal to a larger Australian wealth management firm or European or Asian financial services company that seeks bolt-on acquisitions, and understands the potential of retirement income investing in Australia and overseas.

Longer term, Challenger’s expertise and product suite could be leveraged into Asia. As the region’s middle-class grows and its population ages, demand for retirement income products will rise and new investment markets in the region will form. Australia’s wealth management industry has great potential to expand its presence in Asia and help drive stronger growth in service exports.

The market views Challenger favourably. Nine of 16 brokers have a strong buy or buy recommendation, five have a hold and two a sell, according to consensus analyst estimate forecasts. But a median share price target of $7.85 suggests Challenger is fully valued – an appropriate view for now.

Challenger has raced from $7 in September to $8.10. Further gains could make potential suitors nervous and perhaps encourage them to pounce sooner rather than later.

If Challenger can hold above $8 – its previous high in mid-2014 – it could be at the start of a new leg of share price growth.

Challenger

Source: Yahoo!7 Finance, 29 October 2015

Agribusiness attractions

After soaring gains in several agribusiness stocks this year, takeover enthusiasts could argue the time for corporate activity in the sector has passed. It could just be starting: look at how much foreign investment is pouring in Australia’s dairy sector, to secure long-term supplies for fast-growing Asian markets. I have outlined a bullish long-term view on Australian agribusiness stocks for the Switzer Super Report this month.

Expected global population growth, the boom in Asian middle-class consumption, and chronic underinvestment in the global food and logistics chain, will have foreign companies scurrying for acquisitions.

Our listed agribusiness sector needs greater scale to attract significant institutional capital and help Australian producers raise capital to quicken their expansion and innovation.

Australia’s top agriculture-related companies will look undervalued in the context of one the world’s most powerful investment megatrends: the need to feed more people and improve diets. A lower Australian dollar falls, as expected, will also spark greater foreign interest.

The wine producer, Treasury Wine Estates, has long been touted as a takeover target. Its board sensibly rejected a $3.4-billion bid from private equity in May 2014 – a deal that badly undervalued it – and a second offer soon after. It is now worth $5.2 billion.

Treasury’s $745-million acquisition of Diageo’s US and US wine business this month could deter takeover suitors; but in time it will make the company more appealing.

Treasury is not cheap, although there are growing signs of improvement in the viticulture industry and Asian demand for Australian wine.

Treasury Wine Estates

Source: Yahoo!7 Finance, 29 October 2015

Another agribusiness stock with takeover appeal is crop-protection provider, Nufarm, covered earlier this month for the Switzer Super Report. Nufarm rejected a takeover from China’s Sinochem in 2009, valuing it at $2.6 billion.

Nufarm’s current market capitalisation is $2.2 billion and it has plenty of momentum after operational restructures and management changes. Demand for pesticides has a solid outlook, given the urgency for crops in developing nations to become more productive, to feed more people.

Like Treasury, Nufarm is not cheap but has significant long-term strategic value for a large foreign player. Japan’s Sumitomo Chemical Company, a 23 per cent shareholder, will have a big say in any ownership changes in Nufarm and could lead any corporate activity.

Nufarm

Source: Yahoo!7 Finance, 29 October 2015

Takeover targets update

There was plenty of action in the Switzer Super Report takeover targets this month. Santos and iSelect received approaches and there was market talk about others on the list. Santos rejected a $5.2 billion takeover bid from Scepter Partners on October 22 to acquire it for $6.88 a share. The under-pressure energy producer reportedly received a $1.5-billion offer this week for its stakes in Western Australia oil and gas fields.

The battle for Santos has a long way to run, so it stays on the takeover targets list. The takeover bid and this month’s $1.1-billion merger of Beach Energy and Drillsearch Energy confirm my earlier thesis that the energy sector was undervalued and ripe for consolidation. My attention has turned to AWE, another energy play on the takeover targets list.

The well-run AWE rejected Sensex Energy’s $750-million bid in December 2013, but must be on the radar again for bigger energy players looking to consolidate mid-tier producers.

I was pleased to see iSelect receive a recent takeover approach from a private equity firm, if not lose yet another CEO after Alex Stevens’ surprise resignation. iSelect was added to the takeover targets list in May because the market was underestimating its recovery and its long-term strategic value as consumers increasingly purchase insurance online. A private equity firm or one of the large UK policy-comparison sites could do a lot more with iSelect. They would have to pay up to get it.

Among other stocks, Reckon received overdue consideration as a takeover target in the mainstream media this month. Reckon confirmed it appointed Macquarie Capital to help it consider strategic options and presumably shore up its takeover defences.

Reckon was among the first stocks added to the Switzer takeover targets list last year. I can’t see how the lucrative accounting software market can sustain four big players in MYOB, Xero, Reckon and Intuit. Although its larger rivals attract more attention, Reckon has plenty of strategic value thanks to its customer base and recurring revenue streams.

In this month’s portfolio changes, Challenger, Nufarm and Treasury Wine Estates are added. The disappointing Ensogo and Mincor Resources are dropped, to make way for the new additions and reduce the list’s exposure to micro-cap stocks.

Here is the updated list:

Source: Morningstar (for one-year total shareholder return). Return assumes dividends are reinvested. *Return over one year to October 28, 2015. SP Dow Jones Indices for ASX 200 total return over one year.

Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply stock recommendations or financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at October 28, 2015

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.