broker at abn amros view of mfs

"As expected, MFS has today announced a demerger plan. We believe that this is a positive plan as it is separating two businesses that would be appropriately (lower) geared in this environment and would allow each business to be valued fairly in its own right.

There are two key issues from today's announcement and conference call in our view:

1. The market has interpreted the equity raising as a raising for all however is an entitlement issue to shareholders to reduce gearing so that businesses are appropriately geared. The proposed timing (April) of the issue would suggest that this was not being done as a matter of urgency but rather as matter of prudence given current market conditions and advice (UBS, Macquarie, Grant Samuel). MFS's level of gearing has not changed materially since last balance date and stands at approx. A$1.4bn including Stella's debt (A$930m). Investors interpreted the equity raising as meaning MFS's gearing is too high or that it can't pay down its debt. We believe that this is incorrect. There are also warranted concerns about raising equity at a depressed share price.

2. The market has misunderstood the issue of internal loans between MFS subsidiaries as additional gearing rather than matched assets and liabilities within the group. Unfortunately management communicated this message badly at today's conference call.

We will have more information out as it comes to hand. Management stated that operationally the group is performing well. However we acknowledge risks (ie reputational) to the financial services business such as fund outflows from today's events. We expect negative press over the weekend. Management intend to announce more details and potential circut breaker next week.

Investment view - At the current share price we expect there will be corporate interest in MFS and therefore investors should HOLD as to someone else this stock is worth significantly more than A$1. Investors with a higher risk profile would be buying MFS at these levels."